Images of Lanchester Strategy part II, presented at the QFD conference, Belo Horizonte Brazil

This paper is a continuation of the work in progress presented at the eleventh Symposium on Quality Function Deployment Novi Michigan June 1999 [1], [2]. This paper outlines the use of Lanchester Strategy in Quality Function Deployment (QFD) and concludes with a number of case studies of interest to the business community in Brazil.

Abstract

The Lanchester Strategy of sales and marketing based on F. W. Lanchester’s equations of combat [3] has been extensively developed in Japan since the early ’60s [4]. The strategy is based on a rigorous mathematical analysis of military and marketing warfare that uses elements of game theory, probability, ecology and calculus to show that the Lanchester laws are verified in theory and practice [5]. As this knowledge filters out into the business world [6], the interest is in real life case studies [7, 8 and 9] that illustrate the application and practice of the Lanchester Strategy. However, companies are reluctant, if not paranoid about releasing information on strategic planning, market share and business strategies to potential competitors, as any case study of more than superficial interest will cover these areas in detail. An approach to gaining real world case studies is to view recent articles in the business journal through the lens of Lanchester Strategy. Using data taken from recent Wall Street Journal articles, we will provide sufficient market share and background information to generate a number of case studies that illustrate the Lanchester strategy.

Introduction: Lanchester Strategy and QFD

In his QFD tutorial at the recent 11th Annual QFD Symposium [10], Glen Mazur pointed out that new product sales count for some 50% of company sales and companies now average 40 to 50 new products per year. Fueling this are R&D expenditures of about 2.8% of Gross Domestic Product in developed countries. Despite the importance of new products and this huge investment in resources and technology, the failure rate for new products runs at about 35% [11].

The Lanchester strategy enables the QFD process to take into account the structure of the marketplace, the relative position of the company based on the “shooting range,’ and shows that the attributes of the new product must be at least 1.7 times better than competing products [1], [7]. The Lanchester strategy thus “closes the loop” in the QFD cycle by correctly positioning company position and new product in the marketplace.

Hotel Brazil, the hospitality industry – competing with Marriott

Brazil is a top tourist destination with many large local and international hotel chains competing for clients. So how does a small hotel succeed in competing with the big guys? Like competing with Microsoft or Intel, or wrestling with alligators, very carefully. In the hospitality industry we know from the literature that the Marriott hotel chain is very highly regarded in quality and customer satisfaction, so the question for a small hotel in a Marriott city is how to compete.

The answer that Lanchester strategy tells us is in providing the client something that the large well funded hotel chains cannot possibly have and charge a premium for it. The solution is a hotel with funky furniture and staffed with iconoclastic individuals. Staff reporter Nancy Keates writing in the Wall Street Journal of October 31st 1997 provides the background to this case study.

A growing number of small, chic hotels are finding that hostility sometimes sells better than hospitality. Places like New York’s Royalton, Miami’s Delano Hotel and San Francisco’s Diva Hotel charge $200 to $400 a night and tend to offer small rooms, weird furniture, little conference space and the aloof service of an exclusive restaurant. But they have something else: 90% occupancy rates, even at prices that can run 20% higher than competitors. “They dramatically outperform the market,” says Bjorn Hanson, who heads Coopers & Lybrand’s lodging division.

Most of this hotel’s decidedly unglamorous occupants say they just can’t resist the glitter. “The attitude of these hotels is intentional,” says James Eyster, HVS Professor at Cornell University’s School of Hotel Administration. The managers of such hotels say they try to be more casual and “edgy” than traditional luxury hotels. “We hire people to be themselves,” says Robert Dann, general manager of the Mondrian. Ian Schrager, who owns the Mondrian, likens running a hotel to a stage production, where sets and appearances are crucial. He denies that his staff are rude, but readily admits he has held “casting calls” to hire some employees. The bellmen wear cream-colored faux Armani suits, and the lobby resembles a museum of contemporary furniture. By contrast, traditional hotels, like Ritz-Carlton Hotel Co. and Four Seasons Hotels Inc., recruit heavily from hotel schools.

Hotel case review: Lanchester strategy tells us that to compete with a larger well entrenched company, the new entrant must differentiate its product/services which can then be sold at a premium. Eclectic furnishings and an individualistic approach to staffing are a combination that the major hotel chains find difficult to compete with.

Carrefore cleans up Wal-Mart in Sao Bernardo

In a lead article on the front page of the October 8, 1997 edition of Wall Street Journal, staff writers Jonathan Friedland and Louise Lee describe how Wal-Mart Stores Inc. is finding out that what plays in Peoria isn’t necessarily a hit in suburban Sao Paulo. Adapting to local tastes may have been the easy part. Three years after embarking on a blitz to bring “everyday low prices” to the emerging markets of Brazil and Argentina, Wal-Mart is finding the going tougher than expected.

Brutal competition, market conditions that don’t play to Wal-Mart’s ability to achieve efficiency through economies of scale and some if its own mistakes have produced a flood of red ink. Moreover, the company’s insistence on doing things “the Wal-Mart way” has apparently alienated local suppliers and employees. No one is counting Wal-Mart out, of course. With sales of nearly $105 billion last year and a profit of $3.1 billion, the Bentonville, Ark., behemoth has deep pockets. And it has revised its merchandising in Brazil and Argentina and made other changes. Its four newest stores are smaller than the initial outlets in Sao Paulo and Buenos Aires and are in midsize cities where competition isn’t so fierce.

At a recent supercenter opening in the midsize Brazilian city of Ribeirao Preto, shoppers practically beat down the doors to scoop up ovens and television sets. But such enthusiasm is hard to sustain. At an older supercenter in Avellaneda, a suburb of Buenos Aires, few shoppers are in the store during peak hours on Sunday. Hugo and Mariana Faojo help explain why. Browsing in the shoe section, the young couple says they see little difference between goods at Wal-Mart and those at a nearby Carrefour. For groceries, they prefer Supermercados Jumbo SA, a Chilean-owned chain, where they say they find high-quality produce and fresh meats.

Not only did Carrefour arrive first – it now has a total of about 67 hyper markets and 48 supermarkets in Brazil – but also it is maneuvering with prices and promotions to keep Wal-Mart off balance. When Tomas Gallegos, who manages Wal-Mart’s new store here, prints up a flier advertising bargains, the nearby Carrefour responds in just a few hours by offering the same products at a few cents less – and its fliers are handed out at the entrance to the Wal-Mart parking lot.

Wal-Mart’s effort to stock a wide variety of goods and squeezing the costs out of the supply chain are also in trouble. Carrefour in La Plata, Argentina, stocks 22,000 items, while the Wall-Mart next door carries 58,000. Some items like American footballs and leaf blowers (useless in the concrete jungles of the inner city) found few buyers. But timely delivery of merchandise is a relative concept in the bumper-to-bumper traffic of Sao Paulo where Wall-Mart depends on suppliers or contract truckers to deliver most of its goods directly to stores. Because it doesn’t own its distribution system, it can’t control delivery nearly as well as it does in the U.S. Stores here sometimes process 300 deliveries daily, compared with seven shipments a day at U.S. locations. But logistics aren’t the only issue. Eleven South American suppliers have taken umbrage at Wal-Mart’s aggressive pricing policies and for a time refused to sell goods to the chain. Wal-Mart doesn’t get special deals just because it’s a big U.S. company, some domestic suppliers say.

Wal-Mart has also been slow to adapt to Brazil’s fast-changing credit culture. Not until last February did the company start accepting postdated checks, which have become the most common form of credit since Brazil stabilized its currency in 1995.

Supermarket case review: Lanchester strategy tells us that the leading company entering a new market place cannot use the same strategy, going one-on-one with the leader in the new location is a recipe for disaster. Better strategy is using the strength of the parent company for acquisition of a minor player (particularly if no company has over 26.1% market share) that can serve as an entry points to markets and culture. Carrefour has been in Brazil since the mid 70s is the leading chain with 115 stores and has just acquired control of 14 supermarkets of the Roncetti group in Espirito Santo state. Department store JC Penney is pursuing a different strategy for its Brazil market entrance. Penny is renting 23 to 26 department stores owned by the Mesbla and Mappin group. Lanchester strategy tells us that a good strategy for entering a new market is by merger, acquisition or some other cooperative venture [7].

Chrysler innovation for small truck market penetration

The Brazilian truck and auto market is shaping up as one of the most competitive anywhere writes Wall Street Journal staff reporter Gregory L. White in the August 13 1998 edition. He goes on to write: A total of 13 auto companies from Europe, North America, Japan and Korea have announced plans to spend $19 billion by year 2000 building new factories in Latin America’s most populous nation. At Chrysler’s $315 million Brazilian plant, which makes Dakota pickup trucks, the most radical manufacturing innovation is known as the rolling chassis. At a plant about two miles down the road from Chrysler’s, Dana Corp. of Toledo, Ohio, assembles the truck’s frame, axles, brakes and wheels – a total of 320 parts, complete with fully inflated tires – all within 108 minutes of getting an order by computer. Dana’s chassis accounts for about one-third of the value of the Dakota, a far larger share than any individual supplier-built unit would take up in traditional auto manufacturing.

This concept of “modularity” in which suppliers assemble dozens of parts into subassemblies for the automaker is the Holy Grail of the automobile industry. This process could slash manufacturing costs by thousands of dollars a vehicle, some of which could be passed on to the car buyers. At minimum, this advance promises to hold retail prices stable for years. Big price differentials are a sure way for a new entrant to muscle into a competitive market and gain a chunk of market share in a short time. Lanchester strategy tells us that when no company holds more than 26.1% of the market share, the market is essentially unstable, allowing easy access to new entrants with a differentiated product.

In Brazil, the rolling chassis allowed Chrysler to hire fewer people and make its factory smaller, reducing upfront investment and shortening start-up time. The rolling chassis also provides Chrysler big discounts on import duties on parts, equipment and the thousands of other vehicles it brings into Brazil from the U.S. Because Dana assembles the rolling chassis in Brazil, Chrysler can count the entire value of the unit as local, allowing it to import other parts, such as body panels, engines and transmissions, from the U.S.

Including imports, company officials expect Chrysler sales in Brazil to reach $1 billion next year, up 3% from $750 million expected in 1998, and more than double the $450 million recorded in 1997. Executives say profit margins in Brazil have been well above those in North America, although they decline to provide figures. Part of the reason for the higher profits is Chrysler’s decision to aim at the top of the market in Brazil, a departure from its broader approaches its larger competitors are taking here.

That kind of narrow appeal also fits well with Mercedes, which has long focused on the top end of the market. In fact, some analysts suggest that Brazil could become a testing ground for joint dealerships for DaimlerCrysler, something the companies wouldn’t dream of in the U.S., where Mercedes and Chrysler have very different images.

Chrysler Brazil case review: Lanchester strategy tells us that in a fragmented market where no company owns more than 26.1% share, there is opportunity for a new entrant to secure a foothold with a differentiated product as the other companies engage in ferocious competition. In addition, aiming at the top end of the market ensures higher profitability and recognition. [Note the classic example of this with the introduction of the Lexis and Infinity luxury cars].

Brazilians like Coca-Cola, but what they love is to drink Guarana

For a company that considers that it’s main competitor is water (as in H2O) the Coca-Cola Company can be a daunting competitor. In Japan, Coke came on with a rapid-fire product imitation campaign that replicated new drink tastes developed by small innovative companies. In Brazil however, Guarana based beverages account for more than one-quarter of all soft drink sales. Whether consumed as a powdered additive or a soft drink that tastes a little like bubble gum, guarana packs a bristling caffeine punch, reports Wall Street Journal staff reporters Matt Moffett and Nikhil Deogun in their July 8 front-page story.

According to Amazon jungle legend, the first guarana-berry bush sprouted on the spot where a lightning bolt struck a pair of star-crossed lovers from rival Indian tribes. While Coke has countered with two guarana brands of its own, patriotic Brazilian consumers have been less than rapturous about gringo guaranas. Coke’s fiercest Brazilian rival, a guarana bottler called Cia. Antartica, which controls one-quarter of the market for the Amazon elixir, has been ridiculing the soft-drink giant on TV ads that, in effect, accuse Coke of guarana envy. Now, Antartica says it’s merging with Brazil’s No. 2 guarana maker, a giant beverage firm called Cia. Cervejaria Brahma SA, to form a juggernaut that will give Coke even bigger headaches.

Antartica’s current ad campaign in Brazil is less about making love than making war – with Coke. In one television commercial, an Antarctica pitchman stands before a rain-forest guarana plantation and directs a pointed question towards viewers: “Now ask Coca-Cola to show you the Coke tree.” That ad came in retaliation for a Coke spot in which taste tests showed Brazilians preferring Kuat. Unfortunately for Coke, Kuat fared better against the competition in the ad than it has been doing at checkout counters [perhaps Coke has a new product in line called Quat, after the hallucinogenic plant leaf widely consumed in North Africa and the Middle East -Ed].

And Coke is now facing a new threat from mom-and-pop beverage producers taking advantage of cheap, nonreturnable bottles – and Brazil’s ancient love affair with guarana. Not long ago, Maria Leticia Sanchez de Oliveira put some new life in a failing family bottling company in central Brazil by launching a guarana called Ginga, which means “jiggle.” “We wanted a name that represented Brazil,” she says. “We weren’t thinking about sex. But if people are thinking about that when they buy Ginga, that’s fine.”

Coke wars case summary: Lanchester strategy tells us that a policy of “me-to” replicating the competitor product can wear down a market follower. Guarana drinks have a unique position in the Brazilian market place that is difficult for an interloper to displace. Coke’s immediate response has been the price cut. Lanchester strategy tells us that an alliance between lesser ranking companies can give economies of scale and pose a serious threat to the market leader [7]. Just released data shows an over all gain of market share by Coke in Brazil of 1% in April May of 1999, with sales of Kuat also rising 0.2%.

Summary

Based on Lanchester’s equations of combat, developed in Japan, the Lanchester Strategy of sales and marketing will give you greater insight into the dynamics of the marketplace. The tools and techniques of Lanchester Strategy show how to penetrate a new market, and how to defend an existing market position. Companies are reluctant, if not paranoid about releasing information on strategic planning, market share and business strategies to potential competitors, as any case study of more than superficial interest will cover these areas in detail. An approach to gaining real world case studies is to view recent articles in the business journal through the lens of Lanchester Strategy. Using data taken from recent Wall Street Journal articles, we re-examine the published data to understand company planning and strategy within the context of Lanchester Strategy.

Bibliography

[1] Proceedings, Eleventh Symposium on Quality Function Deployment, Novi Michigan June 1999. Published by the QFD Institute, 1140 Morehead Court, Ann Arbor MI 48103. http:www.qfdi.org

[2] Lanchester Readings, 1914 to Present, edited by John Schuler. 1999 Lanchester Press, ISBN 1-57321-016-1

[3] F. W. Lanchester, Aircraft in Warfare, the Dawn of the Fourth Arm, (new edition of Lanchester’s 1916 work) 1995, Lanchester Press, ISBN 1-57321-17-X.

[4] Dr. N. Taoka, Lanchester Strategy: an introduction, Volume 1, 1997 Lanchester Press, ISBN 1-57321-009-9.

[5] Dr. T. Onoda, Lanchester Theory: Science to Win the Competition, 1999, Lanchester Press, ISBN 1-57321-015-3.

[6] Dr. Ted Lewis, Friction Free Economy, 1997, Harper Collins Books, ISBN 0-88730-009-0.

[7] Shinichi Yano, New Lanchester Strategy an Introduction, 1996, Lanchester Press, ISBN 1-57321-000-5.

[8] Shinichi Yano, New Lanchester Strategy: Sales and Marketing for the Strong, 1997, Lanchester Press, ISBN 1-57321-005-6.

[9] Shinichi Yano, New Lanchester Strategy: Sales and Marketing for the Weak, 1998, Lanchester Press, ISBN 1-57321-004-8.

[10] Glen Mazur, QFD Tutorial, Eleventh Symposium on Quality Function Deployment, Novi, Michigan, June 1999. Published by QFD Institute, 1140 Morehead Court, Ann Arbor, MI 48103. ISBN 1-889477-81-8

[11] Robert G. Cooper, Winning at New Products, 2nd ed. Addison-Wesley, ISBN 0-201-56381-9

Acknowledgements, from the following articles in Wall Street Journal,

1. Hotels find hostility sells better than hospitality. October 31, 1997 by staff reporter Nancy Keates.

2. The Wal-Mart way sometimes gets lost in translation overseas. October 6, 1997, by staff reporters Jonathan Friedland and Louise Lee.

3. Chrysler makes manufacturing inroads at plant in Brazil. August 13, 1998, by staff reporter Gregory L. White.

4. Brazilians like Coke, but what they love to drink is Guarana. July 8, 1999 by staff reporters Matt Moffett and Nikhil Deogun.