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The Relationship Between Secrecy & Competition

In What Is Strategy?, I define a strategy as “a set of well-aligned activities with the aim of occupying a valuable position within a competitive landscape.”

Surprise is an incredibly useful tool during competition since telling our competitors what we’re going to do before we do it gives them a chance to devise a better course of action than they would have made otherwise. And since there’s always a competitive element to strategy, it seems like we would always want to keep our strategies a secret until we execute on them.

For example, it would be foolish for Apple to tell the world that it’s entering the content creation space 12 months before they’re ready. Netflix, Amazon, and the entire Hollywood machine would have time to adapt and make it harder for Apple to successfully enter the space. Having early access to this information would give competitors the chance to form alliances with one another, sign exclusive deals with producers, writers, actors…etc, and even lobby legislative bodies to make it harder for Apple to enter the space.

Secrecy is a requirement for the success of many strategies.

Just Between You and Me

However, there are scenarios when making our strategies well known is actually better than keeping them a secret – particularly when the competition isn’t fierce.

Since fierce competition destroys profits, it’s often wise to try to avoid it anyway. Signaling our high-level strategy is a good way to let nearby competitors know which battlegrounds are important to us and which are not.

Tesla’s Strategy

Tesla’s original master plan, written in 2006, clearly states: “The strategy of Tesla is to enter at the high end of the market, where customers are prepared to pay a premium, and then drive down market as fast as possible to higher unit volume and lower prices with each successive model.”

Musk continues:

So, in short, the master plan is:

– Build sports car
– Use that money to build an affordable car
– Use that money to build an even more affordable car
– While doing above, also provide zero emission electric power generation options

In announcing this, Elon Musk put his cards on the table. None of the existing car manufacturers or any of the new upstarts made a serious effort to copy this strategy. And it took years for anyone to try to compete directly with Tesla in the high end market – which Tesla temporarily vacated as they began to move down market.

Even now, 12 years after Musk publicly announced Tesla’s master plan and strategy, no all-electric car has copied Tesla’s models and started a fiercely competitive war.

In fact, Tesla has succeeded and the company has entered a new strategic phase which Musk described in another blog post.

Musk knew that no other car company would copy his strategy and that Tesla would benefit more from announcing their plans than from keeping them secret.

The Competition

While Tesla didn’t broadcast every strategic move they were planning, Musk was very explicit about the company’s overarching strategy. It makes me wonder how the rest of the auto industry thought about Tesla and all-electric cars at the time.

Maybe some direct competition – real or even just announced – would have forced Tesla to play their cards a little differently and given one competitor an edge? Maybe not.

The Raisin Cartel

In 1937 the US Department of Agriculture picked a group of raisin farmers and handlers and gave them the power to constrict the amount of raisins that all farmers could produce in a given year. This cartel, called the Raisin Administrative Committee, made it a federal crime to attempt to sell more raisins than they determined.

Fun facts: The United States Department of Agriculture, created in 1862, is part of the administrative branch but basically has the power to create laws – a role that’s traditionally reserved for the legislative branch. In 2017 the USDA employed over 105,000 people and had a budget of $151 billion, nearly 8 times NASA’s budget.

Even though cartels, collusion, price-fixing, and other monopolistic practices are clearly violations of US antitrust law, in 1937 a few lucky raisin farmers and handlers became part of a government-protected cartel. The stated purpose of the cartel was to “stabilize” the price of raisins.

Specifically, the Raisin Administrative Committee “a requirement that growers set aside a certain percentage of their crop” to give to the Government, “free of charge.” These raisins are then destroyed, donated, or sold in “noncompetitive” markets, which artificially increases the price of raisins for consumers like you and me (but not my mom – she hates raisins).

In the 2003-2004 growing season, raisin growers were required to set aside 30% of their crop. But that was a relief from the season before when growers were forced to set aside a whopping 47% of their crop.

But like it or not, the rules were the rules. Until they weren’t.

In 2002, when the Raisin Administrative Committee told Marvin and Laura Horne that they could only sell 53% of their raisin crop, they choose to disobey. “The Government sent trucks to the Hornes’ facility at eight o’clock one morning to pick up the raisins,” the Supreme Court opinion reads, “but the Hornes refused entry.”

They were fined $480,000 for the market value of the raisins – even though they would not be compensated that amount when forced to give them to the government – and an additional $200,000 for disobeying orders. Over the next 12 years, the case bounced around various courts until it finally reached the Supreme Court in Horne v. Department of Agriculture.

The court’s opinion was that “Raisins…are private property – the fruit of the growers’ labor – not public things subject to the absolute control of the state.”

Another raisin grower, Dan King, thought that Marvin Horne had acted unfairly: “I think that there’s a set of rules that everybody was playing by during the time that he was not. You know, it’s like everybody stops at the stop sign but not everybody. [If] somebody doesn’t, it causes a problem. And we needed to have the whole industry following the rules or nobody following the rules.”

This is exactly how cartels normally collapse – some members want more for themselves and begin to “cheat.” They produce more than their quota and soon enough everyone is cheating. Except in this case, “cheating” meant competing to supply the right product to the right customer at the right price. While the Supreme Court’s opinion may mean that the cartel members can no longer constrain supply and therefore inflate prices, it also means that consumers pay a lower price on the free market – a clear win for consumers.

WTF is going on in Raisin-town?
Notes: 1) Apparently Dan King is a member of the Raisin Administrative Committee. 2) By the way, the ‘S’ to the far left of his name stands for “Sun-Maid Member Representative,” which collectively controls over 20% of the committee at present. Interesting that a private company has any say in a government agency, let alone a 20% say. 3) Also of note was that the Chooljian Family represents 3 members (and 1 alternate), the Kazarian family has 2 members, and the Sahatdjian family (related to the Sahatjian family) also represent 3 members. Together, these three families control an additional 17% of the member votes. 4) Finally, it turns out that “Sahatjian” v “Sahatdjian” is not a typo but that the two families are related. In fact, there was a real “Sahatjian” v “Sahatdjian” in 2014 – a huge (>$3.25m) lawsuit between the two related families that seems to suggest that things get ripe in the raisin racket frequently – even within families. (Screenshot: Dec 14, 2017)

While I’m glad that things worked out okay for the Hornes and for US raisin consumers, it does make me think about all the other places where consumers are paying artificially high prices because of cartels and how many of those cartels are being protected by those in power.

And while this is an amazing case of a farmer breaking bad rules in order to change them for the better, there was clearly a large element of “right time, right place” involved in the Horne case. Which makes me wonder: How do you know when to be the raisin rebel or when to surrender to the rules?

Credits & Sources:
I originally heard about the Hornes through the NPR Money podcast – one of my all-time favorite podcasts.  And here’s the Supreme Court’s 42 page opinion.