Billionaire How-to Strategies: The Choke Point

Controlling the Industry Choke Point

In military strategy, a choke point (or chokepoint) is a geographical feature (such as a valley or defile) which forces an army to go into a narrower formation (greatly decreasing combat power) in order to pass through it. A choke point would allow a numerically inferior army to successfully fend off a larger army since the attacker would not be able to bring his superior numbers to bear. (from Wiki)

I recently finished Martin Fridson's How to be a Billionaire: Proven Strategies from the Titans of Wealth. One of the most important observations he offers about billionaires is that they tend to have little regard for the status quo and the rules of behavior that support it. For example, if they see an opportunity to take over an industry, they go for it regardless of the acrimony from established players which such action will trigger. One popular strategy for upsetting the industry apple cart and achieving dominance can be likened to business bliztkrieg. This entails spotting the industry choke point and seizing control of it.

Let's illustrate this strategy with a number of examples from various sources.

The Robber Barons

One of the finest books on business strategy is actually The Robber Barons despite the fact that Matthew Josephson didn't set out to write such a book. The Robber Barons were absolute masters at identifying and controlling the choke points in various industries—particularly railroads. For example, if freight had to be transported by two or more separate railroad lines, as was often the case back then, to get to its ultimate destination, the Robber Barons would look for a means to shoehorn themselves into a controlling position with as little investment as possible. Often this was achieved by acquiring control of a small railroad that served as a connector between two larger lines. Why spend a fortune to buy a huge line when you could maximize control with minimum investment by only controlling the choke point?

This strategy was employed over and over again by the so-called Robber Barons.

Standard Oil

Standard Oil's founder John D. Rockefeller, perhaps the most famous billionaire of all time, had an aversion to free market competition for good reason. In the early days of the oil business the industry was comprised of thousands of small wildcatters who often competed solely on price which led to never-ending boom-or-bust cycles. When you have everyone trying to underbid everyone else dotcom era style, the effect on profit margins is disastrous. As a result, Rockefeller began looking for a means of creating cooperation amongst suppliers in order to stabilize oil prices at sustainable levels.

Initially he looked at acquiring control of the oil fields themselves. However, he quickly discovered that he couldn't afford to buy out all the thousands of wildcatters.  Not even Rockefeller pockets were deep enough for this strategy. He then realized that the next two links in the oil industry's value chain, refining and transportation, was comprised of far fewer players. Here he had the financial strength to dominate. He moved quickly to buy most of the refineries. Those he couldn't induce into selling were blown up by gangs in his pay. (This apparently was one of the earliest recorded uses of the newly invented explosive called "dynamite".) In order to secure the most favorable shipping rates, he had to use a different strategy. Here he had to form mutually beneficial alliances with the rail road owners because his fellow billionaires weren't likely to respond in the desired manner to intimidation tactics.

In the end, he achieved his goals in both sectors.

Las Vegas

The Martin Scorsese movie Casino opens with an extended scene in which Robert De Niro's character explains how Las Vegas came to be. In a nutshell, the Mob and the Teamsters completely controlled access to the city in the early days.  If someone wanted to build anything larger than a bread box approval had to be gained from both parties.  Without their approval, your building materials would simply get lost on the way to the city.

Another more recent movie example of the use of choke points is 300. Since almost everyone has seen it, I don't need to dwell on the details of how a small group of Spartans held off the Persian army by controlling the narrow Pass of Thermopylae until Greek reinforcements could arrive.

The Internet

In the online world, the most powerful choke point is Google. With search market share somewhere between 60 and 80%, depending on which source you use, the company completely dominates the Net from the perspective of small business. Read my two earlier posts on Google's unhealthy market dominance by following the links. The second article, Is Google Really Good for Small Business?, has generated a lot of interest.

In MBA programs students are taught to analyze the links in an industry's value chain and ask, "Where would be the best place to play if I wanted to enter the industry?" One obvious way to answer this question is by looking for choke points which can be dominated.

You don't need John D. Rockefeller's  resources to employ the choke point strategy. Oftentimes, you can use it to achieve dominance in one sector of an industry for a brief period--one just long enough to trigger windfall profits. I have one client who has been scrambling to corner the market for a simple connector part which allows an important peripheral device to be attached to one of the hottest selling gadgets out there today (sorry, I am sworn to secrecy here).

Copyrights 2007 - Peter Ireland

If you're interested in investing in yourself by learning more about how to implement this particular billionaire strategy and others, check out my new Billionaire Strategies Course.

If your business career is just starting out, you should invest in a copy of The Smart Startup Guide on financing startups.

Comments

[Caprinardo Delirio]

Another good one, Peter. For the record I have order both books.

[Neil]

Thank you for this, it's got my partner and I thinking about a revision to our business plan.

[Mitchburger]

Props for actually introducing some new topics to business blogs. The other 5 million blogs just keep regurgitating the same old shit. It's getting stale.