Why companies fail or on the need to develop a general strategy

December 6, 2018

Traditionally, competition is considered to be an integral part of a market economy, one of the engines of progress, the cause of the emergence of qualitatively new solutions and breakthrough technologies. However, Peter Thiel, a well-known businessman, an investor, a member of the PayPal Mafia, writes in his “From Zero to One” book that competition is an obstacle to progress. Comparing the economic categories of "competition" and "monopolies", he explains that in a competitive environment companies produce the same goods, and in order to attract customers they reduce prices to a minimum, which accordingly leads to a decrease in their profits to a minimum. As a result, companies operating in a competitive environment lack the resources to conduct expensive research and development to improve their products.

 

Thiel further emphasizes that the absolute leaders in the market are not companies that are ahead of all their competitors, and not those companies that establish their monopoly due to state benefits or breaking the law, but exactly those that have achieved a monopoly position thanks to their breakthrough technologies, scientific research and unique developments, so that no company can compete with it: in fact, owing to its newest technologies, the company opens up a new niche, where it remains a monopolist until others adopt these technologies. Therefore, these companies are inclined to continuously improve their technologies to maintain monopoly position.

He also argues that exactly this kind of monopoly companies are the sources of innovation, as they accumulate large capital resources, so they can afford to carry out capital-intensive research and development. Moreover, the latter is a vital issue for such companies, since in the absence of constant innovation they risk losing their monopoly position and the corresponding profits.

This is reminiscent of the assertion of the famous Chinese strategist of antiquity Sun Tzu, who wrote in “The Art of War” that the best victory is the one obtained without a fight. This statement can be applied to companies operating in the market: in order to maximize their profits, companies must avoid competition, reaching the level of monopoly due to their innovative solutions.

A prime example of such companies are Amazon and Google, which in 2017 spent $22.62 billion (12.7% of revenue) and $16.62 billion (15% of revenue), respectively. Basically, these companies were created in a highly competitive environment and did not receive any preferences from the state, but they became monopolies because of their technologies. Theoretically, any other company can become their direct competitor, but they do not become the one only because they cannot recreate Amazon`s and Google`s unique technologies.

It should be noted that we do not advocate the establishment of monopolies through state privileges, especially through criminal activities. We only argue that entrepreneurs should be able to break away from the daily routine and look beyond the horizon in order to be able to turn their companies into absolute leaders. And for this they need to develop and select the right development strategy for a clearer understanding of the prospects and opportunities opening up for their companies and to avoid vital mistakes.

Of course, companies may try to introduce advanced technologies in order to get out of the competitive environment, but without a well-thought-out and carefully calibrated strategy, these measures may turn out to be inopportune, lead the company to large losses and give only short-term results.

 

In this case, one of the most effective solutions tested in international practice is to attract professional consultants. The advantage of this is that they have extensive experience in developing and implementing development strategies for similar companies in the relevant sector of the economy. Moreover, being external consultants, such companies have the opportunity to look at the business processes from the outside, thereby gaining an advantage in the form of more complete and relevant information, as well as they represent a goldmine due to their extensive experience, intellectual resources and expertise, which is the cornerstone in a strategy development and which most companies often do not have enough.

 

 

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