Understand the game, then change the rules

Three fundamental paradigms have been used to define a superior player.

The oldest paradigm focused on understanding the future. The firm that can predict the future better than the rest will be the superior firm. This is founded on the principle that if a firm knows what will happen better than the rest, it can take the more correct direction. Thus, knowing what will come can be a competitive advantage. In this first paradigm, firms invest in predicting the future.

However, we all know that, given the kind of world we live in, predicting the future has become increasingly difficult. This has brought about the second paradigm. The competitiveness of a firm can come from its ability to flex. Since the future is unpredictable, then the firm that can flex faster than the rest will be the superior firm. Those who cannot flex cannot survive.

Entrepreneurs and entrepreneurial firms have always played the third paradigm. It is neither based on knowing the future nor on being flexible. Rather, it is based on the paradigm of changing the rules of the game. A superior firm is one that can change the rules of the game continuously and that leave those who can flex to merely survive. Those who can do neither will simply fade away–fast.

However, one must be careful in using this powerful paradigm. If one changes the rules of the game without understanding the game, he/she will be labeled crazy or loko-loko. But if one changes the rules of the games based on a full understanding of the game, such a person will be called innovative, creative or magaling. This means that the third paradigm requires that the entrepreneur must first understand the game.

Q. How does one know the game?

A. Knowing the game starts with understanding how the game is played. The next critical step is understanding the essence of being superior in the game. Understanding the game requires us to see the form or rules. Understanding the essence requires us to understand why the rules are such. Do not mistake regulations or laws as the essence. These are forms of the game. Often, the rules of the game are market-driven.

Definitely, one must understand why the market drives it in that manner. Often, the answer is also found in the rules of other industries. For example, the rule for differentiated pricing is: credit price is higher than cash price. Cash before delivery can command a lower price.

In the pre-paid cell phone game, however, cash before delivery is higher than credit price. The rule of differentiated pricing is now changed. Pre-paid is higher priced. Why is this so? The firms wanted to increase revenue via more usage. The area of expansion is not only via frequent uses by current subscribers but also in creating a new market.

At first, only those who had money could afford cell phones. The enterprising firms wanted to enter the untapped "those who had less money" market. They knew that people with less money often borrowed from the informal lending sector where the cost of borrowing was higher compared to the formal lending sector. Those with less money were often credit unworthy and/or had no time to put together the necessary documents to apply for credit. In such an instance, the customer was willing to pay a premium for not having to present documents an/or for not being credit-worthy.

But more importantly, the default payment in this informal lending was also lower than the default rate of formal lending. Studies have shown that the less fortunate are among the better payers of credit.

Understanding your customers’ behavior in another industry can, thus, be the basis for changing the rules of your own industry.

Q. How does one know whether changing the rules is indeed a correct move?

A. If it becomes the new rules of the game, then it is correct. Otherwise, you may have done an innovation that was not founded on understanding the industry or game. For example, the adoption of the practice of pre-paid cards by all industry players indicates that the change is indeed correct.

Q. Do you need a lot of resources to change the rules of the game?

A. No, but you need a lot of knowledge, innovativeness and the right attitude. Know your customers’ needs. Know your craft. Have an open listening and uncompromising mind.

For instance, an entrepreneur from Quezon City is changing the rules of the air-conditioning game. He started his business in a small shop that served the air-conditioning needs of taxis. His customers always asked him to find a lower-cost answer to their air-conditioning problems.

Because of this market demand, he sharpened his craft and knowledge of the air-conditioning system. One of the single biggest cost items in the system was the compressor. When there were compressor problems, most shops (big and small) often recommended the replacement of the compressor. This Quezon City entrepreneur, because of his knowledge and innovativeness, went into compressor repair.

Now, he repairs and replaces components insider the compressor. He does not accept a puede na iyan attitude This compressor must work according to its capacity. If he cannot repair the compressor, that is the only time he will for its replacement. This scheme not only allows the customer to have the same cooling at lower costs but also increases the number of loyal customers. Today, he has more non-taxi customers. In addition, many are trying to pick up his know-how in compressor repair.

Q. Why should entrepreneurs live by the third paradigm?

A. First, one cannot play the game and win against those who put up the rules. Second, quite often, the rules have been designed for a technology, a market and a set of customers that existed sometime ago. Therefore, be creative, be innovative. Serve the current needs of the customers.

Q. Is it easy to live by the third paradigm?

A. No. Today, most rule-changing innovations can be copied fast. As such, the entrepreneur must continue to develop ways to change the rules of the games. There are too many "me-too" types around. Make sure that by the time the competitor can copy from you, you are again a few steps ahead in the game. Keep on listening to the customer. Update your craft. Say to yourself: I better change the rules before someone else does. After all, an entrepreneur must be an entrepioneer.

(Alejandrino Ferreria is the associate dean of the Asian Center for Entrepreneurship (ACE) of the Asian Institute of Management. For further information/comments, you may mail him at: [email protected]).