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Watching the oligonomy game

An interview with Steve Hannaford, the «father» of the new buzzword

Oligonomy is a new concept coined by an American Steve Hannaford, 56, for a new market situation where a few sellers and buyers change the rules and dominate. The word is a mix of oligopoly (a market dominated by a few sellers) and oligopsony (a market dominated by a few buyers). Steve, based in Swarthmore, Pennsylvania, with a Ph.D. from University of Toronto, is a well-known business writer in US. He launched in 2002 a very particular blog about the new oligopoly situation - OligopolyWatch.com.

Today the strategy for multinationals and groups is to have an advantage in both directions, in both sides - basically to be the gatekeepers between all the players. We are witnessing the spreading of this situation in almost every market and market segment. Due to the complexity of the new competition matrix in lots of markets, for many companies this is a necessary defensive move - Oligonomy or die! The M&A frenzy in some sectors helps to explain also the rapid diffusion of oligonomies. A brief note in the Forethought section of Harvard Business Review (Economics- Both Sides Now, HBR, March 2005 edition), gave oligonomy concept a worldwide audience.

Steve's blog: Oligopoly Watch


Interview with Steve Hannaford by Jorge Nascimento Rodrigues, editor of Gurusonline.tv


INTERVIEW


«Oligonomy (the combination of oligopoly and oligopsony) has been around as long as markets have existed. The advantage of becoming the essential middleman is a strong temptation, the best position in any market. But I believe it has become a semi-conscious strategy of many companies in the last 10-15 years», says Steve Hannaford.

Consolidation with M&A is the only way for sustainability of the leaders or candidates to leadership in mass mature markets?

Consolidation with M & A is not the only option. Organic growth is another option, the classic one. A few companies, like Wal-Mart, McDonalds, and Microsoft, for example, have grown primarily through organic growth, though those companies have reached the limit on such growth. Wal-Mart is finding that international expansion is much easier if they buy existing chains (in the UK, Brazil, etc.) Microsoft has always had a policy of acquiring small firms with new ideas, and it is doing that at a faster rate, especially in the area of security. McDonald's is the biggest holdout. It has experimented with buying other chains, but retreated.

«Microsoft, the closest thing to an old-fashioned monopoly, has been under constant attack from antitrust laws, both in the US and EU. Far more advantageous is having a few predictable rivals who will divide up the market-that is a situation antitrust regulators have grown used to allowing».

How you see the impact of the new wave of multinationals from Asia (China, India, for example) and Latin America (Brazil, Mexico, for instance) in the oligonomy game?

While up until a few years ago, almost all the multinational expansion was coming from the US and Western Europe and snapping up local companies in Latin America and Asia, for example, we are starting to see some changes. One notable move is Mexico's Cemex, now the leading concrete maker in the world and expanding through mergers and acquisitions into the US and Western Europe, most spectacularly through the buyout of the UK's leading cement/concrete producer, RMC Group. Similar things are happening in China, Taiwan, India, and Brazil, all taking advantage of the same open borders and buying tactics used by companies like Nestle or Citigroup. While manufacturing in such countries has often been as low-cost clients to big Western or Japanese multinationals, the tables may be starting to turn.

Oligopoly is better than monopoly for dominant companies?

Monopoly in the current legal climate is all but impossible, except in some local services: supplying water, electricity, and cable TV. Microsoft, the closest thing to an old-fashioned monopoly, has been under constant attack from antitrust laws, both in the US and EU. Far more advantageous is having a few predictable rivals who will divide up the market-that is a situation antitrust regulator have grown used to allowing. And duopolies or oligopolies of three or four companies, now growing common, have many of the advantages of monopolies without the legal and public relations headaches.

«The biggest danger is in the ways that a few powerful companies tend to rewrite the rules. While they are constantly complaining about too much regulation, they are working with officials to rewrite laws and regulations to give the biggest companies competitive advantages».

And for society? What can do a free market society to prevent the downside of these situations?

The biggest danger is in the ways that a few powerful companies tend to rewrite the rules. While they are constantly complaining about too much regulation, they are working with officials to rewrite laws and regulations to give the biggest companies competitive advantages. In the US, especially, this is commonplace, from drafting legislation, sitting on trade policy groups, monitoring wage and health care policies, changing tax rules and financial rules to help the richest companies get richer at an increasing social cost. One critical aspect is in the area of definitions, where big corporations have had critical roles in writing definitions of such terms as "organic" and "genetically modified".

Co-opetition is a "politically correct" name for oligopoly or even oligonomy?

Competing companies in nay industry have much in common. Laws and regulations that help one help all the major players. They tend to converge in terms of techniques and products, and they tend to hire staff from one another (who better?) and think alike. While winning the competition with rivals is important, even more important is winning against the companies directly upstream and downstream (the suppliers and the consumers). In many industries, industry associations fight that fight for the biggest companies. In this way they cooperate strongly without technically colluding.

You introduced the concept of oligonomy. Since when we can observe this trend?

Oligonomy (the combination of oligopoly and oligopsony) has been around as long as markets have existed. The advantage of becoming the essential middleman is a strong temptation, the best position in any market. But I believe it has become a semi-conscious strategy of many companies in the last 10-15 years. For example, the big worldwide buyers of soybeans and corn (companies like Archer Daniels Midland and Cargill) have redefined themselves as oligonomies through acquisitions and international expansion over the past decade. The era of open world trade has been a big impetus.

«The consumer goes to the market or the restaurant and is offered a selection of packaged foods processed and provided by those vendors. Even "Alternative" foods like "organic" or "natural" foods increasingly come from the same big food makers, under different brands».

Which oligonomy sector(s) impressed you more and why?

The agribusiness sector has to be the most troubling and the most indicative. Across the world, farmers who grow anything from beef cattle to cocoa beans to soybeans are faced with a rapidly diminishing number of companies they can sell to. Those companies squeeze them to reduce costs, and every farmer now finds himself competing with every other farmer in the world. And they have to grow standardized crops that meat the requirements of those companies and world markets. The farmers in turn can buy feed, seeds, fertilizer, insecticides, and herbicides, from a smaller number of suppliers (some of the same multinationals). This leads to monoculture of plant varieties and animal stocks, along with the push for genetically modified crops that can resist the herbicides required. The buyers and processors sell in turns to a diminishing number of food companies worldwide (Kraft, Nestle, General Mills, Danone, etc.). The consumer goes to the market or the restaurant and is offered a selection of packaged foods processed and provided by those vendors. Even "Alternative" foods like "organic" or "natural" foods increasingly come from the same big food makers, under different brands.

How can new entrants (innovators) and smaller participants circumvent oligonomy situations?

It's getting very difficult. Innovators tend to have one of two choices: a) get bought out by a bigger company or b) get crushed by rivals who steal your ideas. Many business plans are now about establishing a new idea (something big companies are horrible at) and then cashing out. The other strategy is the boutique approach - never getting big enough to attract the attention of the big companies. Of course, there are occasional new companies that come out of nowhere and manage to grow big, the classic business success story, but it's getting much harder as big companies are on a constantly lookout for disruptive new companies.

«Now, the idea is that specializing and dominating in one or several related businesses, you can have some influence on both prices and costs, so that you can (as an oligonomy) pressure on prices or costs during a downturn to protect yourself against radical swings, by ether raising prices or reducing costs».

Which was the impact of the Digital Revolution over this situation?

In some areas, it was thought that the Internet would allow for a wide-open marketplace with free access to all. Some of that has happened, but not enough to make a big difference. And now companies like IAC, Amazon, and Yahoo are snapping up the most profitable sites and forming new web oligopolies for travel, information, and so on. The digital age has also allowed very large companies to centralize even more, with real time feedback on everything. Wal-Mart is the leader in this: it knows immediately the sale of every CD, every bottle of vitamins, every box of breakfast cereal, and every pair of socks. This immediate information, in the right hands, makes the ideals of just-in-time inventory and analysis of all sales trends available in the central office. It makes large multinational oligonomies all the easier, and gives them levers for control of the market that small competitors cannot match.

The oligonomy strategy is better than building conglomerates in related or not related activities, so companies can protect themselves from the extremes of business cycles and the complexity of the market matrixes of today?

The older idea for protection against business cycles was to own several different kinds of business that were based on different cycles so that when, say, insurance was up, for example, manufacturing might be down, and vice versa. The problem was that it was hard to really understand and maximize any of the businesses. Now, the idea is that specializing and dominating in one or several related businesses, you can have some influence on both prices and costs, so that you can (as an oligonomy) pressure on prices or costs during a downturn to protect yourself against radical swings, by ether raising prices or reducing costs.


Who is Steve?
M.A., Ph.D. University of Toronto

Business and technical writer with over 300 magazine articles, along with white papers, technical guides, and several award-winning business newsletters.
Co-author of Workflow Reengineering (Adobe Press, 1996) and Teams and the Graphic Arts (Prentice-Hall, 1999).
Business consultant on process reengineering and team-building for a dozen US companies.
Speaker at over 20of business conferences and trade shows on technology and its impact on businesses.

Editor of blog www.oligopolywatch.com since 2002.
Steve can be contacted at Hannaford@comcast.net

 
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