As Luck Would Have It: Reaping Big Rewards from a Positional Advantage

How Mo Yan’s Nobel Prize win had someone else laughing all the way to the bank.

Changing times can lead to changing fortunes. Recently, events gaining international attention have changed two enterprises’ fortunes for the better. One is a single-person operation while the other is a multi-billion dollar corporation; but both involve liquor and illustrate an important concept in strategy.

When it was announced that Chinese author Mo Yan had won the Nobel Prize for Literature, he was not the only one celebrating. An engineer surnamed Hou living in Beijing was as well. Six years ago–supposedly while inebriated–he registered the liquor brand name “Mo Yan Zui” which translates as “Don’t Say That You Are Drunk” (the Nobelist’s name translates as simply “Don’t Say” so that the brand also translates as “Drunken Mo Yan”). Registration cost Hou RMB 1,000 and the name was unused, and presumably worth little, until the Nobel announcement. Shortly after, Hou was contacted by numerous distilleries and ultimately sold the name for RMB 10 million after tax–a return of 10,000 times.

Hou’s windfall was due to what strategy researchers call a “positional advantage”. Broadly, there are two ways in which an enterprise can gain a competitive advantage over others and reap above-average profits. A positional advantage arises from the position it holds in an industry (for example, the most convenient location for a coffee shop or a taxi medallion allowing operation of one of a limited number of taxis in a city). The other is a “capabilities-based” advantage which arises from the ability to do things better than others. DreamWorks Studios’ ability to produce blockbuster movies or the local mechanic who is able to fix a car’s problem better than anyone else are examples.

Hou’s advantage derived from his position of holding a coveted brand name (unless he actually had the foresight in his drunken state to predict Mo Yan’s win in which case he really does have a capabilities-based advantage and should open a consultancy to help clients chose brand names). This gave him a competitive advantage over those who did not own such a highly-coveted name and allowed him to earn an above-average return.

Another liquor brand’s fortunes also changed recently. Xi Jiu, a brand of baijiu (a strong rice-wine liquor favored at Chinese banquets), has seen a surge in sales. Again the reason has to do with its position rather than its producer’s capabilities. The first Chinese character in Xi Jiu is exactly the same as that of the recently-appointed Chinese leader Xi Jinping. Although first produced over 60 years ago, Xi Jiu’s sales only recently surged as the handover to Xi became imminent and people stocked up on the presumption that the name association would make it an appealing gift.

This same episode shows how a positional advantage can be vulnerable–as conditions change, they can undercut the position’s value. As Xi Jiu’s sales increase with Xi’s appointment, sales of Moutai–China’s most famous baijiu may drop. Why? Xi has been emphasizing the necessity of fighting corruption within the Communist Party and Moutai is the favored drink for plying government officials for favors. An effective crackdown on corruption would nullify Moutai’s positional advantage by reducing its value in facilitating favors. Usually one person’s gain is another person’s loss but not in this case. Both Xi Jiu and Moutai are produced by the same firm–Kweichow Moutai, a liquor company with nearly 20 billion RMB in revenues. Like Kweichow Moutai, firms benefitting from a positional advantage must always be on the lookout for changing circumstances that will undercut their position.

Note: Next time I will discuss the ways in which a firm can gain a positional advantage and why this matters for society.