Tuesday, April 15, 2008

Monopoly rules - Milind Lee

Monopoly Rules by Milind Lee was a book that I completed reading last week. I didn't have time to publish what I thought about this book last week, so this is a bit long overdue.

In a nutshell, I think this book is very interesting. The author talks about the wrong focus on SCA (sustainable competitive advantage) whereas they should first focus on whether their business have a monopoly. Let me explain. Monopoly, according to the book, isn't exactly the definition that text books gave. To state it simply,

Monopoly is an ownable space for a useful period of time.

There are 2 aspects of monopoly, space and time. Space is talking about the product uniqueness, service uniqueness and price difference. You find that those 3 that are mentioned are actually something tangible space - that can be seen. There are other intangible space, namely custom/tradition and emotional involvement. Perhaps I need to explain a little more on custom/tradition and emotional involvement by giving some examples.

Some companies, by virtue of them having been around, will have what I call brand presence. The book quoted Standard and Poor, having been around for so long, will be the first place a newbie will look for to find out about a company or a unit trust. Emotional involvement will be those that Warren Buffett owns...coke, see's candy and so on.

Time will be the other aspect of a monopoly. There only 2 things to talk about it - either we know the length of time of the monopoly (trademark, regulation, patent, copyrights etc) and unknown (how long will ebay monopolise the online auction trade).

These are the different types of monopoly.

1. Asset monopolies

This is based on tangible assets or brand (yea, i know brand is intangible, but that' how the book classifies it under. A brand is something that can be seen, hence it's classified under asset by the author)

Limited natural resources, unique products/services, breakthrough in technology, license/patents/technologies/copyrights are all examples of this type of monopolies. The author sees this type of monopolies as old-schooled and will be less and less relevant in today's fast changing economy. These are easy to see and hence they are easier to erode by competitors.

2. Situational monopoly

This is one that exists because there is a need that no other companies met or even discovered. Even in generally bad industry (like airlines), certain companies can still find a little need that is totally unmet by others can carve a situational monopoly for itself.

Monopolies need to be protected by 3 havens:

1. Regulation haven - controlled by legal rights such as patents and government controlled.

2. Technological havens - such as the difficulty to do, copy, reverse engineer or it simply costs too much

3. Customer islands - these are network effects such as high switching cost and loyal customers. Think ebay.

I think this part of the book is most interesting. It talks about how to identify monopoly in companies so that one will know when he/she sees one. These are the 5 questions he/she ought to ask when searching for one:

1. Do your customers see only you if they are looking for this product or service?

2. Are you invisible to your competitors?

Some companies are in denial and/or are complacent and arrogant, thinking that this and that companies poses no threat to their business until it's too late. It happened to AT&T and Bells, long time ago in US.

3. Are the true competitors outside the dotted line?

By dotted line, the author means that these competitors are classified outside the definition of your industry. For example, when thinking about the competitors of airlines, sometimes the competitors are not other airlines, but are other modes of transportation. By looking outside the scope of your immediate industry, perhaps more can be said about the strength of the monopoly.

4. Can you price like a monopolist?

5. Do you earn unusually high profits?

Quite a good reading as I learnt more about this aspect of analysing my own business and other companies :) Next time you evaluate any company, think along this line:

1. Where is the monopoly?
2. How does it came to be?
3. How long does it last?

I think it'll be quite a good guide to analyse any companies qualitatively :)