What can billiards teach us about business competition?

Every pool player knows the cue ball’s vital role in the game: when hit by a cue stick, the cue ball strikes the other balls, transferring energy and causing them to move.

The cue ball is just an intermediary ― it is the ball that gets hit first, but it’s not the one that the player is targeting, and it’s often not the ball that moves the farthest.

Fascinated by this concept, Richard Makadok thought the cue ball example might be a great way to understand and illustrate something that has nothing to do with billiards: the relationships between competing businesses. If a pool player can hit a cue ball a short distance to make another ball move a much longer distance, he wondered, could the same thing happen with companies? Could a company’s competitive advantage have a bigger impact on a distant rival than on its more direct competitors?

In a recent paper, Makadok, a professor of management and human resources at Fisher, looked at competition within an industry, specifically grocery stores. He found that competitive tension isn’t always just between two firms, and that competitive advantages gained by companies can impact others within the industry, no matter whether they’re direct competitors ― like a cue ball striking other balls.

“If a competitor at the low end of the market gains a competitive advantage, it makes sense for the middle market player to try to get out of their way and move upscale,” said Makadok, the JPMorgan Chase & Co. Chair for Excellence in Corporate Strategy. “That can transfer the impact of the competitive advantage from the low end to the high end ― what we call the cue-ball effect, similar to where the energy from the pool cue hits the cue ball and the energy gets transferred to the target ball.”

To explore this idea, Makadok and his colleague looked at how Walmart’s expansion from conventional discount store to supercenter led to future growth and shaped not only nearby competitors like Kroger, but also more distant ones like Whole Foods.

All three of these supermarkets offer a similar variety of grocery products but one, Whole Foods, offers higher quality products, so it illustrates  competition along a single quality-based dimension ― what economists call “vertical differentiation.” A small number of vertically differentiated products is one of two components for the cue-ball effect. The other is whether companies are able to reposition.

“Vertical dimension of differentiation happens when you have very basic, low-cost products like Walmart competing with mid-level rivals like Kroger, who in turn compete with high-end premium products like Whole Foods at the top of the market,” said Makadok. “When Walmart displaced Winn-Dixie from most markets in the southeast, Walmart’s big efficiency advantage was like a cue stick hitting the cue ball, Kroger, and motivating Kroger to reposition upscale to get away from Walmart. But that upmarket move pushed Kroger closer to the high-end turf where Whole Foods lived, like the cue ball hitting the target ball.

“The problem for the target ball is that there's usually so few customers at the high end of the market, the high-end competitor can't as easily escape ― they’ve got nowhere to move upscale. In the cue-ball metaphor, they might go flying off the pool table.”

This observation prompted the question: Could he and his fellow researchers show that Walmart’s advantage hurt the high-end competitor, Whole Foods, more than the middle-market competitor, Kroger?

The answer was yes.

When Walmart Supercenters opened close to Kroger locations, Kroger began upgrading those stores with fancier décor and new features like organic and prepared foods and cheese and olive bars, becoming a more high-end supermarket.

“So, Walmart replaces Winn-Dixie, a weak competitor at the low end of the market,” Makadok said. “Then, Walmart encroaches on the middle market company, Kroger, which moves upscale through store renovations. The cue-ball effect came into play when Kroger’s upscaling affected sales of the high-end competitor Whole Foods.”

Whole Foods’ stock prices dropped and eventually led to a buyout by Amazon.

“If Amazon hadn't come in and rescued them, Whole Foods would have gone bankrupt,” Makadok said. “Our data ― which included store renovation dates and sales information ― showed that the sales in these Whole Foods stores suffered more in locations near a newly renovated Kroger store.”

The paper explaining the research, “The cue-ball effect: How an advantaged firm's closer competitors can propagate the impact of its advantage to more distant competitors,” was co-authored by Makadok and fellow researchers Natarajan Balasubramanian, of Syracuse University, and Wan-Ting Chiu, of Purdue University.

In general, Makadok said businesses often assume they can only be hurt by companies similar to them and not by companies or products in a different tiered market.

In a similar study, “Competition-driven repositioning,” researchers Myles Shaver and Richard Wang looked at the shifting differentiation of television networks. Their study included 87 product dimensions where stations added more programming like sports, comedy or news.

“With two, three or even 87 dimensional spaces, when a business gains a competitive advantage, other companies don’t have to reposition upscale,” Makadok said. “They can pivot left or right to move horizontally away from the strong competitor without moving close to another business. If everything is all on a single vertical line ― like the supermarket example ― the only way to get away from the guy at the bottom is to move up towards the guy at the top.”

So, what’s the bottom line for businesses today?

“Companies need to have a broader definition of who their competition is and be aware of what's going on in the entire market in order to not be blindsided,” Makadok said.