Judo Strategy: 10 Techniques For Beating A Stronger Opponent

The idea of judo economics, building on analogies with the sport of judo, has been around for at least 20 years. But taking these ideas further to judo strategy means that a framework of strategic principles can be developed to help companies put stronger opponents on the mat.     

The multinomial option pricing model and its Brownian and Poisson limits

The Cox, Ross, and Rubinstein binomial model is generalizedto the multinomial case. Limits are investigated and shown toyield the Black-Scholes formula in the case of continuous samplepaths for a wide variety of complete market structures. In thediscontinuous case of Merton-type formula is shown to result,provided jump probabilities are replaced by their correspondingArrow-Debreu prices.     

Simple binomial processes as diffusion approximations in financial models

A binomial approximation to a diffusion is defined as 'computationallysimple' if the number of nodes grows at most linearly in thenumber of time intervals. It is shown how to construct computationallysimple binomial processes that converge weakly to commonly employeddiffusions in financial models. The convergence of the sequenceof bond and European option prices from these processes to thecorresponding values in the diffusion limit is also demonstrated.Numerical examples from the constant elasticity of variancestock price and the Cox, Ingersoll, and Ross (1985) discountbond price are provided.     

The upstairs market for large-block transactions: analysis and measurement of price effects

This article develops a model of the upstairs market where ordersize, beliefs and prices are determined endogenously. We testthe model's predictions using unique data for 5,625 equity tradesduring the period 1985 to 1992 that are known to be upstairstransactions and are identified as either buyer or seller initiated.We find that price movements prior to the trade date are significantlypositively related to trade size, consistent with informationleakage as the block is 'shopped' upstairs. Further, the temporaryprice impact or liquidity effect is a concave function of ordersize, which may result from upstairs intermediation.     

With friends like these: the art of managing complementors

Intel and Microsoft neither buy from nor sell to each other directly, but they are undeniably in business together. They are probably the world's most widely known pair of complementors--companies that independently provide complementary products or services to mutual customers. Complementors increase the value of each other's offerings and the size of the total market. So it's not surprising that so many just assume that their interests are aligned. Nothing could be further from the truth. Discord can develop in many areas, such as pricing, technology, standards, and control of the market--both in terms of which company has the most influence over customers and which one gets the biggest slice of the pie. The issue of pricing perfectly captures this tension. Ideally, you'd like to price your goods high while your complementors price theirs low. Airlines, for instance, would be happy to see vacation lodgings go for a song, while destination resorts could raise rates and still fill their rooms if customers could fly there for free. The first step in managing relationships with complementors is to develop a deep understanding of their economics, their strategies and goals, their existing capabilities, their incentives for cooperation, and any potential areas of conflict. Then, to gain the upper hand, companies can use a variety of tools that fall into two main categories: hard power (inducements or coercion to get what you want) and soft power (persuasion through indirect means to get others to want what you want). The authors explain how to build both hard power and soft, illustrate the strengths and limits of each, and offer guidelines for choosing one over the other. Conflict among complementors is inevitable, but together, hard and soft power can help companies manage the dark side of complementor relationships and take full advantage of the opportunities that cooperation should create.     

Signaling with dividends and share repurchases: a choice between deterministic and stochastic cash disbursements

We study firms signaling with cash disbursements and show thatthe choice of a deterministic or a stochastic disbursement dependson a property of the firm's production function that is analogousto absolute risk aversion for a utility function. With decreasing(increasing) absolute risk aversion, the high-quality firm prefersto distinguish itself from the low-quality firm with a stochastic(deterministic) outlay. We then study in detail two common formsof corporate cash distributions: dividends, a deterministicdisbursement, and share repurchases, a stochastic disbursement.     

Playing by the rules. How Intel avoids antitrust litigation.

Microsoft and Intel are both obvious targets for antitrust litigation; both wield considerable control in their respective segments of the computer industry. But while Mircrosoft has been mired in court for years now--its name and business practices dragged through the mud, and its very future as a single company thrown into doubt--Intel has avoided a prolonged, high-profile antitrust case. Intel's success is not a matter of luck. The company's antitrust compliance program, refined over many years, has been an integral element in the chip maker's business strategy. In this article, the authors suggest that Intel's approach to compliance provides a valuable model for any enterprise that may come under regulators' scrutiny. They describe how Intel created extremely conservative antitrust compliance standards and then instituted a series of unique training events that had active support from then--CEO Andy Grove and others in senior management. First, live training -- not just instructional pamphlets or videos -- was given to all affected employees. Those classes were followed by customized training programs for different parts of the company. Then, to drive antitrust awareness deeper into the company's memory, Intel carried out random audits of employees' files and conducted mock depositions. "It's fascinating to see," Grove says. "A memo is introduced into evidence and you shrug. You fully understand how that memo could be written. Moreover, you could have written it yourself. And then you see that memo turned into a tool and a weapon against you, in front of your eyes." Intel recognizes that no matter how cautious it is, it will always face extraordinary scrutiny as a market leader. But "since antitrust is embedded in everything we do," Grove says, "we can control our destiny."     

Judo strategy. The competitive dynamics of Internet time.

Competition on the Internet is creating fierce battles between industry giants and small-scale start-ups. Smart start-ups can avoid those conflicts by moving quickly to uncontested ground and, when that's no longer possible, turning dominant players' strengths against them. The authors call this competitive approach judo strategy. They use the Netscape-Microsoft battles to illustrate the three main principles of judo strategy: rapid movement, flexibility, and leverage. In the early part of the browser wars, for instance, Netscape applied the principle of rapid movement by being the first company to offer a free stand-alone browser. This allowed Netscape to build market share fast and to set the market standard. Flexibility became a critical factor later in the browser wars. In December 1995, when Microsoft announced that it would "embrace and extend" competitors' Internet successes, Netscape failed to give way in the face of superior strength. Instead it squared off against Microsoft and even turned down numerous opportunities to craft deep partnerships with other companies. The result was that Netscape lost deal after deal when competing with Microsoft for common distribution channels. Netscape applied the principle of leverage by using Microsoft's strengths against it. Taking advantage of Microsoft's determination to convert the world to Windows or Windows NT, Netscape made its software compatible with existing UNIX systems. While it is true that these principles can't replace basic execution, say the authors, without speed, flexibility, and leverage, very few companies can compete successfully on Internet time.