Applying judo to business strategy

By Roopen Roy May 03 2011

Tags: Op-ed

Judo economics” was a term coined by economists Judith Gelman and Steven Salop to describe a smart entry strategy of a startup in a sector dominated by a large competitor. One of the key elements of judo, a martial art, is the clever use of the size and power of the opponent against him.

David B Yoffie, a Harvard Business School (HBS) professor, and Mary Kwak wrote a seminal book called Judo St­rategy: Turning Your Competitors’ Strength to Your Advantage, examining the applic­ation of judo principles to business. At the beginning of the book, there is a cheeky photograph titled “The weak can overpower the strong”. It shows the then “powerful” Russian president Vladimir Putin (a judo black belt) flo­ored in Tokyo in September 2000 by a 10-year-old frail Japanese schoolgirl.

While teaching judo strategy at HBS, professor Yoffie used the case of Pepsi and Coca-Cola. And while researching, I found, to my surprise, that all the facts of the case are available on the internet.

Both Coke and Pepsi were founded in the 1890s. Coca-Cola was incorporated as a co­mpany in 1892 and Pepsi was incorporated as Brad’s Drink in 1898 and renamed Pepsi in 1903. According to records available in the public domain, when the Great Depression was taking its worst toll, in 1931, Pepsi-Cola filed for bankruptcy due to financial losses incurred by wild speculation on fluctuating sugar prices.

Following the insolvency, Pepsi’s assets were sold and Roy C Megargel bought the Pepsi trademark. Eight years later, the company went bankrupt again. Pepsi's assets were then purchased by Charles Guth, the president of Loft Inc. Loft was in the candy business. But, it also had a distribution capacity via retail stores that had a chain of soda fountains. He tried to replace Coca-Cola at his stores’ fountains. Coke then withdrew the discount on syrup. Guth instructed Loft's chemists to reformulate the Pepsi-Cola syrup formula. It is a matter of record that on three separate occasions between 1922 and 1933, Coca-Cola was offered the opportunity to purchase Pepsi-Cola and it declined on each occasion.

The going became precarious for Pepsi in 1933 after Coca-Cola turned down Gu­th’s offer of sale, thus creating a burning platform for Pepsi. With its back to the wall, Guth, the quintessential entrepreneur, unleashed a high-risk strategy — not realising then that it would be a copybook case of judo strategy.

Those who are familiar with the cola business are aware that the real profits of cola comes from the sale of concentrates and not from the water, sugar, caramel or fizz. So, Guth re-launched Pepsi with a “double for same” proposition backed by an advertisement on the radio with a catchy jingle:

“Pepsi-Cola hits the sp­ot/Twelve full ounces, that's a lot/ Twice as much for a nickel, too/Pepsi-Cola is the drink for you.” In any depression or recession, the propensity of consumers to pay a brand premium is lower. Pepsi began to make a killing in the market. By 1935, Pepsi was catapulted to a clear No. 2 position in the carbonated beverages space and the 12-ounce bottle sales captured 25 per cent of the market.

The reader might wonder why Coke did not retaliate immediately and launch a 12-ounce bottle at the same price and decimate Pepsi while it was still hurting financially? Here is where the power of judo strategy plays out. Coke was a flourishing and profitable company, very proud of its track record and its dominant leadership position in the market. The company’s highly successful and powerful chief executive officer Robert Woodroff declined to pursue a “me-too” strategy and no one challenged him or thought of calling to question his almost religious attachment to the classic 6.5-ounce hobble-skirted Coke bottle.

But to be fair to Woodroff, it was not a case of ideological blindness alone. An army of over 1,000 bottlers of Coke declined to restructure their bottling plants. The bottlers were not owned by Coke and they had invested millions of dollars in bottling plants, which could handle only the standard 6.5-ounce bottles. Sw­itching to a different size bottle would have entailed a huge capital outlay in the midst of a depression. It would have made a very large quantity of empties (stock of re-usable empty bottles) worthless, if Coke cannibalised its own 6.5-ounce size bottle segment. No one was willing to take a hit for these stranded costs. Thus, a smaller competitor, Pepsi, using a maverick judo strategy had turned the strength of Coke (a chain of 1,000 bottlers) to its weakness. It is a matter of record that it was not until 20 years later in 1955 that the 10-ounce “king size” bottles and 26-ounce “family size” bottles were launched by Coke. By that time, while Coke was still the king, Pepsi was rejuvenated as a clear No. 2 hi­ghly profitable business from the brink of extinction.

The essence of the judo strategy is how you turn your rival’s strength and bulk to your advantage. Hint: Look at your competitor’s inflexibility and lack of agility to change and adapt. It applies to business and to any competitive situation, perhaps, even politics.

(The writer is managing director of Deloitte Consulting, India. These are his personal views)