The End of Power (7 page)

Although predicting specific power shifts is a fool's errand, understanding the trends that alter either the distribution of power or its very nature is not. The key is to understand the barriers to power in a specific arena. What technology, law, weapon, fortune, or unique asset makes it hard for others to gain the power enjoyed by incumbents? When such barriers go up and stay up, incumbents become entrenched and consolidate their control. When they go down or stay down, new players gain an edge and can challenge the existing power structure. The more drastic the erosion of any given barrier to power, the more unusual or unexpected the new
players, and the faster they may attain prominence.
Identify the barriers to power and whether they are coming up or going down, and you can solve a large part of the puzzle of power.

Monopolies, single-party systems, military dictatorships, societies that officially favor a particular race or religious faith, marketplaces swamped with advertising for a dominant product, cartels like OPEC, political systems like the American one in which two parties effectively control the electoral process and small ones cannot get a foothold—all of these are situations where the barriers to power are high, at least for now. But some citadels can be stormed—either because their defenses are not as strong as they seem, because they are unprepared for new types of attackers, or, for that matter, because the treasures they protected have lost value in the first place. In such instances the trade routes now bypass them, and they are no longer of interest to marauding armies.

For example, the founders of Google did not set out to erode the dominance of the
New York Times
or other powerful media companies, but that is in fact what they accomplished. Insurgents who use improvised explosive devices in Afghanistan, or bands of Somali pirates who use rickety boats and AK-47s to hijack large ships in the Gulf of Aden, are circumventing the barriers that ensured the dominance of technologically sophisticated armies and navies. The result has been not so much a shift in the power of such armies and navies as a challenge to the very nature of that power.

Barriers to power can differentiate situations that look similar on the surface. A small group of firms might be able to control most of the market share in a particular industry because only they possess the required resources, an attractive product, or a unique technology. Alternatively, they might have successfully lobbied or paid off politicians to create rules and regulations that make it harder, or impossible, for rivals to enter the market. Proprietary technology, access to resources, regulatory protections, and a corrupt insider connection are four very different kinds of advantage. Obviously, power shifts occur when the control of certain scarce resources becomes more critical to competition in a given market, substitutes are found that make it less of a barrier for others, or a new technology makes it easier for many other competitors to enter the market.

While such shifts represent a well-known idea in the world of business, this idea has been less frequently applied to politics and to rivalries between nation-states, churches, or philanthropists. Consider, for example, a
parliamentary system in which a number of small parties have seats and may be involved in forming a governing coalition. Is there a threshold, as in Germany, such that a party needs to have earned 5 percent of the total national vote to be represented in parliament at all? Is there instead a rule whereby a party must score a minimum proportion of the vote in several different regions? Or look at the competition among top universities. Is accreditation difficult, or do employers and graduate schools no longer care as much about the accreditation of the schools whose graduates they recruit?

Barriers to power might take the form of rules and regulations that prove easy or hard to rewrite or circumvent. They might take the form of costs—of key assets, resources, labor, marketing—that increase or go down. They might take the form of access to growth opportunities—new customers, workers, capital sources, religious believers. The details will vary by field. But as a rule of thumb, the more numerous and stringent the regulations, the higher the costs of replicating the incumbents' advantages; and the more restricted or rare the key assets, the higher the barriers that prevent new players from gaining a toehold, let alone forging a sustained advantage for themselves.

The concept of barriers to power is rooted in economics. Specifically, I have adapted the idea of
barriers to entry
—an analytic construct that economists use to understand the distribution, behavior, and prospects of firms in an industry—and applied it to the distribution of power. It is fair to expand the concept this way: after all, the idea of barriers to entry is used in economics to explain a particular kind of power
—market power.

As we know, the ideal state in economics is perfect competition. Under perfect competition, many different firms make perfectly interchangeable goods and customers are interested in purchasing all the products they make. There are no transaction costs, just the costs of inputs, and all firms have access to the same information. Perfect competition describes an environment in which no single firm can influence on its own the price of goods in its marketplace.

The reality is very different, of course. Two companies, Airbus and Boeing, command the market for big long-haul planes, and a small number of additional manufacturers make smaller jets. But innumerable companies manufacture shirts or socks. It is exceedingly difficult for a new aircraft
maker to enter the market. Assemble a few tailors or seamstresses in a workshop, however, and you can produce shirts. A small new shirtmaker may be able to compete with the big names, or at least find a niche in which it can prosper. A brand-new aircraft manufacturer faces less attractive odds.

Industries with stable and narrow structures, where incumbents hold sway and new rivals struggle, feature a great deal of market power. In plain language, this means the ability to ignore competition and still make a profit. In a perfectly competitive market, if you sell above the marginal cost (the cost of producing one additional unit, which is assumed to be the same for all producers in that industry), no one will buy, as all the other competitors will underprice you. The more market power a company possesses, the more it can set its prices without worrying about rivals. The more market power prevails among the companies in a given sector or marketplace, the more entrenched the pecking order. The difference in corporate “league tables” between a sector like personal care and hygiene—where the rankings of firms such as Procter and Gamble, Colgate-Palmolive, and other top companies have barely changed in several decades, and the personal-computer industry, where the rankings have been in utter flux—often has a great deal to do with market power.

Market power is ultimately exclusionary, and thus anti-competitive. But even for the companies that already enjoy a position inside the citadel, protected by barriers that limit the entry of newcomers, an easy life or even survival may be far from guaranteed. Existing rivals may gain market power and turn against them, leveraging their market dominance to buy them out or drive them to bankruptcy. Collusion and exclusion are common among companies that operate in sectors or nations where open competition is stifled and market power reigns. Entrepreneurs like to extol competition, but a chief executive of a dominant firm will be far more concerned with preserving its market power.

These considerations often usefully apply to the power dynamics among competitors in other areas—that is, to actors that are not businesses in search of maximum profit. Ahead we apply this set of ideas to illustrate what is happening to the equivalents of “market power” in military conflict, party politics, and other activities.

What are the sources of market power? In the business world, what causes certain firms to achieve dominance and remain unchallenged for a long
time? Why do some sectors give rise to monopolies, duopolies, or a small number of firms that are able to coordinate their pricing or approaches to regulation, while others remain hospitable to myriad small companies that compete furiously? Why does the configuration of firms in some industries get relatively frozen over time, while in others it changes constantly?

For specialists in industrial organization, who seek to understand how companies gain advantages over their rivals, the factors that make it difficult for a new player to enter a given sector and compete successfully are crucial. And for our purposes, they can illuminate how power is obtained, retained, used, and lost, whether in a market or elsewhere.

Some barriers to entry stem from underlying conditions. They have to do with an industry's technical characteristics: manufacturing aluminum, for instance, requires massive, expensive-to-build, energy-consuming smelters. The underlying conditions may also reflect how much the industry is tied to a particular geographic location. For instance, does it require natural resources that are found only in a few places? Or does the product need to be processed or packaged close to where it will be sold, as in the case of cement, or can it be frozen, as with shrimp from China or lamb from New Zealand or vegetables from Mexico, and shipped around the world? Is a very specialized set of human skills required, such as a PhD in physics or mastery of a particular computer programming language? All of these questions point to requirements that explain why it is easier to open, say, a restaurant, a lawn-mowing company, or an office-cleaning firm than to enter the steel business, where you not only need capital, expensive equipment, a large factory, and expensive and specific inputs but also might incur big transportation costs.

Other barriers to entry result from laws, licenses, and trademarks; examples include bar membership for lawyers, a doctor's license to practice medicine, and the zoning, sanitation, facilities inspection, liquor license, and other hurdles one might face when trying to open a restaurant. Such barriers—whether they stem from scale, access to key resources, access to specialized technology, or legal and regulatory requirements—are
structural barriers
that confront any firm wishing to compete in the market. Even for firms already operating in that particular market, these barriers are hard to change—although firms that have grown large and powerful are often able to influence their regulatory environment.

Alongside these more permanent structural barriers are
strategic barriers
to entry. Incumbents create strategic barriers to prevent new rivals from emerging and to prevent existing rivals from growing. Examples include exclusive marketing agreements (e.g., the one between AT&T and Apple when
iPhones were first launched), long-term contracts that tie suppliers to sellers (e.g., oil producers and oil refiners), collusion and price-fixing (e.g., the infamous effort in the 1990s by Archer Daniels Midland and other firms to fix the price of animal-feed additives), and lobbying politicians to extract unique governmental advantages (e.g., a license to run a casino as a monopoly in a certain area). They also include advertising, special promotions, product placement, frequent-user discounts, and similar marketing tools that make entry difficult for would-be competitors. Indeed, it's hard to break in, even with the most exciting product, when you need an enormously expensive advertising budget to let potential customers know that your product exists and an even larger one to persuade them to actually try it.
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So it is no surprise that quite a bit of competitive ardor, not just in business but in other fields as well, goes into building up or breaking down the barriers to power—that is, affecting the game by changing its rules and requirements. This is especially true in politics, where parties and candidates often expend tremendous energy in battles over drawing up congressional districts (the infamous practice known in the United States as gerrymandering), or over mandating gender parity in parliament and on candidate slates, as in Argentina and Bangladesh, where a quota of seats in parliament is reserved for women. In India, where Dalits (once known as the caste of “untouchables”) have reserved seats in parliament and regional assemblies, intense political and legal battles have raged over extending these benefits to the so-called Other Backward Classes (OBCs). In many countries, leaders with autocratic tendencies have sought to exclude political rivals while preserving a veneer of democracy by pushing through amendments to election law that just happen to disqualify those rivals on technicalities. Battles over corporate contributions in politics, political advertising, disclosure, and access to airwaves are often much more virulent than battles over policy. Parties that vehemently disagree on major policy questions might find themselves in lockstep defending rules that give them, together, the lion's share of seats. After all, a lost election can always be won back, but new rules change the game.
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Ultimately, barriers to power are the obstacles that stop new players from deploying enough of the muscle, the code, the pitch, and the reward, or some combination thereof, to gain a competitive hold; and, conversely, that allow incumbent companies, parties, armies, churches, foundations,
universities, newspapers, and unions (or whatever other type of organization is involved) to maintain their dominance.