The Fat-Cat Effect, Top Dog strategy, the Puppy-Dog Ploy or the Lean and Hungry Look?

Lets try to analyze the following scenario: an enterprise software vendor is trying to decide on the strategy to play in the enterprise software market. Moreover this vendor is a niche player with a popular product and another somewhat less popular enterprise product. What should this vendor do about the less popular product?

Let us use game theory strategies to answer this question. In game theory, we have these four funny sounding so-called ‘taxonomy’ for various strategies. For a quick and dirty (my) definition of these strategies:

Puppy Dog: your competitor will fight back if you fight (play tough), so you do not commit to play tough (be small and look soft)
Top Dog: you play tough and you play hard, you gamble on your competitor to cower in the corner.(be big and look tough)
Fat Cat: You play soft and easy, because you know that your competitor will react by taking it easy as well (be big but look soft)
Lean and hungry Look: You know that your competitor will be at your jugular if you show signs of weakness (play soft) so do not commit to be soft. (Be small but look tough)

To give a slightly academic treatment to these strategies, I am reproducing some stuff from game theory literature (in my own words).

In each of these four strategies, there is an inherent assumption about the way the competitor will react to your actions that is competitor fights backs or steps back. To understand whether your competitor will react in kind or react unkindly we need to understand whether the market calls for so called ‘strategic complement’ or 'strategic supplements’, think of a strategic complement as a strategy wherein the competitors respond in kind. I.e. if player plays tough its competitors will respond by playing tougher or if the player plays soft, its competitors will play soft. On the other hand, strategic supplements imply that competitors respond by giving way if you go in. i.e, when you play tough, your competitor plays soft and vice versa.
Also note that ‘strategic complement’ generally results from pricing or ‘Bertrand game’ where price cuts by one firm results in price matching (equivalent cuts) by its competitor. On the other hand, ‘strategic substitutes’ is generally played in a ‘market share game’ or ‘Cournot game’, i.e. If I capture a large share of the market, the competitor’s share will go down.

Next, we have to decide whether the actions that the player takes, or the commitments that the player makes, makes it tough or soft.
The table above will help us visualise the four scenarios that result from the combination of strategies and the commitments.

The enterprise software market most probably allows ‘strategic substitute’ or Bertrand game. This is why:
1. From the numerous proof-of-concepts (POCs) and discussions with customers that I have been involved in, I have observed that customers do not care much about price. Note: we are talking about big enterprise customers here, not your typical mom-and-pop stores. These products differ from products like Microsoft Windows that are sold to individual customers who are more sensitive to price.
2. Enterprise customers care more about feature set, quality and benefit( than price.)
3. Enterprise customers keep an eye on density of adoption of software in their enterprise; Customers favor software from a vendor who already has a big footprint in their datacenter. I.e, in a datacenter, software from a vendor with a bigger existing footprint keeps expanding its footprint at the cost of software from another vendor. Kind of a market share game.

If we decide that the market for this vendor allows for a Cournot strategic substitutes game, then the two options that this company can chose from are: ‘Top Dog’ or ‘Lean and Hungry Look’. Lets analyze what these two strategies bring to the vendor.

How can such a company play ‘Top Dog’? (or commit to be tough)
· Invest a lot in the development of the new enterprise product to send a clear signal to its competitors.
· Send signals through press releases and advertising campaigns about the intention to play tough.
· Acquire a couple of enterprise software companies to beef up its portfolio and (again) send signals to its competitors.

How can this company play a ‘Lean and Hungry Look’ (or commit not to be Soft)
· Make low-key investments in enterprise software
· Stay clear of head to head competition.
· Reap the benefits accrued out of the popular product to sustain the less popular product.

Which of these strategies have the highest pay off?

The answer to this question requires a long term as well as a short-term perspective. For example, the short-term pay-off of ‘Top Dog’ strategy may be comparatively less than that from ‘Lean And Hungry Look’. ‘Top Dog’ means higher investments and higher all round costs in the near term, however, in the long run, the ‘top dog’ strategy will have higher payoff from increased market share. So, if this vendor is looking for short term pay-off in the enterprise software market, play ‘Lean and Hungry Look’ (stay low-key but do not commit to be soft so that the competitors do not have a free reign, and reap the benefits that accrue out of low losts). For long-term benefits, this vendor should plan to play ‘Top Dog’ and concentrate on expanding its enterprise market penetration