Competitive Strategy, Market Efficiency, and Nemawashi – 46th week of 2020

Nemawashi is a Japanese term that means “to go around the roots,” originally used to describe the process of digging the soil out from the roots of a tree, and introducing the soil from a new location before transplant. The more modern, business oriented meaning, however, is to lay the groundwork before a project starts. In Japan, it is expected that officials are informed about a project before an official kick-off to the project. This informal informational process takes the form of a series of one-on-one meetings with officials, and serves as an opportunity to get the input and gauge the reaction of the key decision makers involved.

A recent HBR article explains how nemawashi can help us to overcome some of the difficulty involved with making decisions over Zoom. The central benefit described is the ability to help key decision makers come to a consensus before the meeting even starts, but I think that there is a much richer, subtler benefit to nemawashi. People feel much more free to explore ideas in a one-on-one setting than they do in a large meeting. Helping people to realise what they actually think and giving them room to change their mind is a huge benefit, outside of trying to find a consensus.

For me, nemawashi highlights the fact that all macro structures, whether a nation, a business or a university, are built of micro structured pairs. A university is made up of many teacher-student relationships, a business of many manager-employee relationships. If you want to understand a macro structure, examine how the micro pairs interact. And if you want to understand what influence you can have on a group, start by examining what individuals you have an effect on. Finally, if you want to improve the relationships within a macro structure, think about what you, as in individual, can do to improve your micro relationships.

Me waiting for my interviewer to join the Zoom call.

Hi All,

I hope you’ve had a good week. In the UK this has been the first full week of our second lockdown. In the news, Trump has been repeatedly lying about election fraud, Dominic Cummings has left Downing Street, and Argentina have beaten the All Blacks for the first time ever.

This week I talk about the competitive relationship between Microsoft and Sony with relation to the new Xbox/PlayStation, I touch on the efficient market hypothesis, and I tell you to get off LinkedIn.

I hope that you have a nice week. As always, if you like what you read, remember to sign up below so that next week’s insights find their way into your mailbox.

All the best, Callum

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Insights of the Week

Xbox Vs Playstation

(Read the full article here.) Sony and Microsoft have been competing for gamers since 2001, when the Xbox was released in the US. At that time, Sony had already been selling the PlayStation for 5 years in the US, and had been selling the PS2 for a year. I personally have very fond memories of the PS2, as do many other people – the PS2 is still to date the biggest selling game console ever.

Microsoft were so keen to compete with the Playstation 2, released 2000, that they sold the Xbox in 2001 at a $125 loss per console so that they were able to meet the PS2’s price point. They also named the project developing the Xbox “Project Midway”, after the battle between the Americans and the Japanese which turned the tide of the Second World War. This was the start of the console wars. Just four years later Microsoft released the Xbox 360 again at $299 like the previous generations. The next year the PS3 was released at $499, battling it out with processing speeds, graphics quality, storage, and exclusive games.

But this seems to be where the battle ends. In 2013 and 2020 both consoles were released at the same price point, the same month, seeming to fight for an edge in graphics quality and processing speed. But if we examine the market that they are both competing in, there doesn’t seem to be a reason for them to fight each other. The console gaming market has large barriers to entry because of the cost of bringing a console to market, as well as the difficulties of getting games studios to produce games for your console. Additionally, there are network effects benefiting both Xbox and Playstation – the console your friends have will affect which console you buy.

This same market dynamic has played out in the past with Coca-Cola vs Pepsi. In this example, best thing for the bottom line, when the other half of the duopoly is happy to play along, has been to focus on being profitable where you are, rather than fighting for the other’s market share. So Microsoft and Sony focus on being profitable – introducing subscription models to get more out of their customers over time – without upsetting the boat and accidentally veering into competition territory. It isn’t surprising that most gaming articles, when comparing the two new consoles – end up saying that neither is better on its own, but the games available will change how attractive each console is.

Competitive collaboration in this form doesn’t count as anti-competitive, but it also isn’t always what is best for consumers. But in this case, unnecessary spending on marketing, advertising, and unnecessary innovation (that doesn’t add to the consumer experience) is a waste for the shareholders. Sometimes competitive collaboration, not trying to grow the market-share by stealing from the other party, is what is best.

The Efficient Market Hypothesis.

The efficient market hypothesis (EMH) states that prices in a market reflect all available information. An extension of this statement means that it is impossible for people to either buy or sell stocks above or below the fair value. A further, more quantitative, extension of this hypothesis is that it is impossible to generate a positive alpha. In other words, it is impossible to consistently beat the market.

This clearly isn’t true, as some people have been beating the market for decades (e.g. Warren Buffet), but the EMH isn’t supposed to reflect absolute truth. Instead, the EMH is just a model. But how accurate is this model?

Recent market movements following announcements by Pfizer make EMH look more inaccurate (not as much as a spike in a stock called CUBA after the Embargo on Cuba was lifted). In case you didn’t know, markets surged after announcements of Pfizer’s vaccine achieving 90% accuracy, with stocks that have struggled during Covid surging the most, but stocks that have benefited from lockdowns dropping significantly. For a long time we have known that many promising vaccine trials were going to announce results in November, so why should this news of a Vaccine have people scrambling to buy stocks in airlines and cruise-ships, and to exit Peloton, Zoom, and Netflix?

Playing devil’s advocate, the results announced were better than we expected. But not good enough to explain a 20% drop in Peloton, a company whose revenue grew 128% in the previous 12 months. The EMH implies that price changes happen as a result of unforeseen news, expected announcements would already be priced in. Additionally, bubbles of any kind cannot be explained by the EMH, neither housing bubbles, nor the 1987 bubble. If prices always reflect the fair values, what makes the fair values spike and drop so severely? A fair conclusion at this point would be to say that the markets are efficient, but it is aspects of human behavioural psychology make it less so. For a summary on the topic from someone who knows more than me, check out the Reframe Finance Newsletter.

The EMH is a long debated topic in economics, so I’m not going to be able prove it or disprove it in a couple of paragraphs, nor do I think that I know enough to claim anything conclusively. But it is still an open topic, with room for more debate. If you want to read a debate between Richard Thaler, the behavioural psychologist, and Eugene Fama, creator of the semi-strong EMH, click here.

Get off LinkedIn

Innumerable studies have linked social media to anxiety, loneliness, and feelings of inadequacy. When I use LinkedIn too much, that last one is the one that gets to me the most. LinkedIn is a career platform, to be used by people when they achieve something big or make a large change. It isn’t natural to see that all the time.

A nice analogy for social media is the following: using social media is like being Elon Musk’s room-mate. If you were Elon’s room-mate you would probably have a distorted view of what a normal level of productivity is and what the normal level of achievement is, and compare yourself negatively to that image. It is the same on social medias, including LinkedIn. Although we consciously understand that we are only seeing other people’s highlight reels, people we often don’t even know, we still compare ourselves to them.

A more data based piece of evidence for not scrolling on LinkedIn comes from a research paper from 2018, which showed that passive use of social media was correlated with depressive feelings, but active use of social media was correlated with the opposite. Passive use consists of scrolling and liking, active use is posting, messaging and commenting. If you want to make the most of your use of social media, spend time being social on social media rather than just scrolling.


This is a nice piece written by an old friend of mine on the power or narratives. This is an interesting technical article on why coffee pods are actually the most eco-friendly. And this is a fascinating article on demons in Miami.

I hope you’ve learnt something useful this week, and enjoyed the read. Remember to like the article wherever you found it, and subscribe if you don’t want to rely on an algorithm to bring you here next week.

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