Thursday, January 10, 2013

Competing against Established Businesses

Most of us who were boarders in Kenyan high schools would brave the early morning chill to attend prep; a rigorous educational exercise that was mandatory in some institutions. As sleep starved teenagers, this was a herculean effort requiring an almost superhuman discipline. However when one zeroed in on their objective, the task would seem relatively easy. Over a few weeks while I was in form three, I had an objective of which I devoted my entire capacity to achieve, and woke before the crack of dawn on many mornings to bring it to fruition. Sadly it was not an A in mathematics, chemistry or physics. Rather I would wake up every morning, before all my classmates, to sneak to the nearby shopping centre to buy two crates of the freshly baked bread.

You see, then just like now I was a businessman. Even in those formative years of my entrepreneurship I understood the basic concepts of demand and supply. Bread in high school is one commodity that has unusually high demand. Apart from the need for sleep, the need for food (high energy carbs being a favourite) is synonymous with adolescence. I tend to believe it has to do with the rapid physical changes that are taking place in the teen's body. This need was acutely self-evident in our school which had no canteen to sell this precious commodity. Instead, various entrepreneurial students would sneak in a couple of loaves through their day-scholar colleagues bought at 20/= (USD 0.25) and sell them in quarter pieces at 7/= (USD 0.08) or 28/= (USD 0.33) for a full loaf - a 40% profit! At a couple of loaves this would mean a student would make 16/= a day, a high margin but in my opinion not worth the risk - which included suspension from school.

But the entrepreneur bug had bit, and I undertook to see if I could exploit the opportunity while minimizing (or justifying) the risk. Surveying the marketplace, I concluded that the main problem was that despite the high demand there were too many vendors. In addition, each vendor's supply was inconsistent - there was no guarantee of supply on any particular day. Like I lightning bolt, the solution hit me. One Sunday - this was the day with the highest demand - and flush with capital (how I got it is a story for another day, but it involves using cash meant for my medicine) I proceeded to each vendor with blitzkrieg efficiency and bought all the bread in the school. The twenty odd loaves would become Harry bread shop's first stock. As word got round that I could be the only person in the school with bread, my first hungry customers started streaming in. By ensuring I steadily replenished my stock with my early morning forays (which also improved my margins as I bought a loaf at whole-sale prices of 18.50/-), I established my dominance as the school's foremost bread retailer in a couple of days netting a tidy sum of 380/= (USD 4.5) per day.

It's a great story that I like to retell, and it is always sure to delight my audience. However within the story is a darker element, which is the topic for today. Although I was successful, in my pursuit of success I decimated the competition using highly anti-competitive behaviour. Suffice to say, that once the customers came to me and saw the quantity and quality of my stock, they never returned to their former vendors.

If you are a startup business trying to break it into the big league, you are bound to find yourself in similar situations. Competitors can use price wars, lock in wholesalers, or bully you through their trade associations to make sure your business remains small. Facing a competitor with a huge marketing war chest and no scruples to match might seem daunting, but thankfully now it doesn't have to be.

The Competition Act 12 of 2010 makes it illegal for businesses to engage in anti-competitive behaviour in Kenya. This is intended to level the playing field for businesses and improve the welfare of consumers. Anti-competitive behaviour such as: abuse of dominant positions, using trade associations to restrict trade, using contracts to restrain trade, having unwarranted concentration of economic power, collusion or concerted practices among organisations, and price fixing have all been outlawed.

Two institutions have been set up to enforce the competition law, these are: the competition authority and the competition tribunal. They are now the big fish in the pond. Now, it might take some time for entrenched anti-competitive business practices to be fully rooted out in a our business culture (some could have started as long ago as when the business owners were in high school!) but with this law, and the consumers right enshrined in the constitution, it is only a matter of time.

My small contribution to leveling the play field has been in the online company registration domain. With our new platform Incorporator, we give business owners the ability to choose from a wide array of lawyers to register their company. Lawyers will bid for your work, and you get to choose who will do the work at your discretion based on who has the best price and best ratings as rated by their other customers.

Competition is great for innovation which can ensure great success for a business and many satisfied customers. However you no longer have to deal with behaviour from your competitors that is anti-competitive. Try out your luck today by competing against the big boys, the law is on your side.

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