STR 421 - PowerPoint PPT Presentation

1 / 35
About This Presentation
Title:

STR 421

Description:

... e.g. Enterprise: dealers Dig deep: Why does the industry look the way ... about market growth and entry ... strategic decisions Quick & dirty ... – PowerPoint PPT presentation

Number of Views:119
Avg rating:3.0/5.0
Slides: 36
Provided by: wachowicz
Category:
Tags: str | dirty | growth | look | quick

less

Transcript and Presenter's Notes

Title: STR 421


1
STR 421
  • Economics of
  • Competitive Strategy
  • Course Wrap-up
  • Michael Raith
  • Spring 2007

2
The key question
  • Efficient markets successful strategies quickly
    attract imitators
  • How, then, can companies achieve and maintain
    above-normal returns?
  • Why do some companies consistently make more
    profits than others?

3
Part I Obtaining and sustaining a competitive
advantage
  • Competition and markets
  • 2. Value creation and competitive advantage
  • 3. Horizontal and vertical scope of the firm

4
The Bertrand trap
  • A game you dont want to be in
  • Assumptions
  • Homogeneous goods
  • No capacity constraints
  • One-shot game
  • Prediction competition drives prices toward MC
  • With fixed costs, firms make losses

5
Sellers offering goods of different quality
  • Sellers compete by offering consumer surplus bids
    B-P.
  • PS 2, FMA and network effects
  • What matters for winning is not benefit or cost
    but the difference Dell, RTE cereal brands vs.
    private labels
  • Prices reflect costs, benefits, and competitive
    bidding
  • Firms with a competitive advantage often have
    some freedom in choosing prices Dell, Dupont

6
Three ways out of the Bertrand trap
  • Limit industry capacity Dupont
  • Cooperate on prices American Airlines, RTE
    cereal, Infant formula
  • Differentiate be different
  • Differentiation relaxes price competition
  • CCS, Dell, Enterprise, ValuJet

7
Five forces analysis Taking a snapshot of an
industry
  • Whats going on in the industry in general?
  • Who appropriates value created? Firms in industry
    or others?
  • Extreme cases Metal cans vs. RTE cereal
  • Dont forget about complementors 6th force
    e.g. Enterprise dealers
  • Dig deep Why does the industry look the way it
    does?
  • Product differentiation, role of advertising/RD,
    first-mover advantages, ability to collude, etc.
  • A useful analysis already requires considerable
    knowledge of how markets work

8
Limitations of Five Forces
  • No conclusive answer to question Should we enter
    this industry?
  • entry decision must focus on competitive
    advantage
  • Only snapshot industry may look different in a
    few years

9
Industry dynamics What determines market
structure in the long run?
  • Good strategic decisions must anticipate likely
    changes in the market, and market structure, in
    the future
  • Coors, Birds Eye, Dupont, RTE cereal, EMI
  • Predictions about market growth and entry are
    related Dupont
  • Forces towards a more concentrated market
  • Economies of scale (look at MES/market size)
    Dupont
  • Intense price competition Metal cans, PCs,
    opposite PS 1, Restaurants
  • Escalation of spending on endogenous fixed or
    sunk costs Beer, RTE cereal, CT scanners (as
    market matures)

10
Part I Obtaining and sustaining a competitive
advantage
  1. Industry analysis
  2. Value creation and competitive advantage
  3. Horizontal and vertical scope of the firm

11
Positioning horizontal and vertical product
differentiation
  • Firms are vertically differentiated when they
    offer different quality/cost combinations.
  • Brands vs. private labels in frozen food and
    cereal, Delta vs. ValuJet
  • Cost vs. benefit/differentiation strategy
  • Firms are horizontally differentiated when they
  • target particular groups of customers Dell,
    Enterprise
  • offer products with attributes that appeal to
    some customers but not others (light-bodied)
    Coors, Honey Nut Cheerios

12
Activities and strategic fit
  • Check how a firms activities fit with the market
    environment (external fit) and one another
    (internal/strategic fit)
  • Same market can support different strategies and
    sets of activities Dell vs. Compaq
  • A successful strategy is supported by all
    activities of the firm
  • CCS e.g. one-month inventory
  • Dell all activities tailored to particular
    subset of business customers
  • Enterprise HR policies
  • Most choices involve some tradeoff.
  • Why arent other firms doing the same?

13
The productivity frontier in practice
assessing competitive advantage
  • To assess your or rivals competitive position,
    look at
  • Cost drivers what factors determine costs?
  • Beer transport costs
  • Dupont scale and experience
  • RTE cereal ingredients, packaging
  • Benefit drivers what factors contribute to
    buyers valuation?
  • Coors mystique, freshness
  • CCS quick response
  • EMI technology, service

14
Quantitative cost/quality comparison
  • Simple compare /unit, not of sales or costs
  • Coors
  • PS 3, ValuJet vs. Delta
  • Fancier use own cost/quality position, and cost
    and benefit drivers, to estimate rivals
    cost/quality positions.
  • Dell

15
Sources of a sustainable advantage1.
Impediments to imitation
  1. Regulatory restrictions
  2. Patents EMI?
  3. Superior access to inputs or customers or
    complementors Enterprise, Dupont
  4. Strategic fit CCS, Dell, Enterprise, ValuJet
  5. Experience/organizational learning Dupont

16
Sources of a sustainable advantage 2.
First/early-mover advantages
  • PS 2, First-mover advantage?
  • PS 3, Capacity choice game
  • Three conditions
  • Being first/early mover
  • First move (e.g. entry) is a credible commitment
  • Second movers not deterred if first mover might
    exit/ back down gt Sunk costs important
  • Entry unprofitable for second mover. Depends on
  • Market size gt not too large!
  • Intensity of competition

17
Types of first-mover advantages
  • Scale economies Look at MES/ size of relevant
    market
  • Dupont
  • Geographic or positional preemption
  • CCS as last-resort canner, Coors in 70s
    (location),
  • Enterprise, RTE cereal
  • Reputation for quality
  • CCS, Infant formula
  • Building reputation/brand image through
    advertising Are buyers responsive? Beer, RTE
    cereal yes PCs not much, Frozen food
    initially yes, later less so

18
Types of first-mover advantages (contd)
  • Switching costs how difficult is it for buyers
    to switch?
  • Metal cans no Instant messaging yes
  • What exactly is the nature of switching costs? CT
    scanners
  • Network effects where do they come from? How
    strong?
  • Direct Instant messaging
  • Indirect Choice Hotels (guests and affiliated
    hotels)
  • With new products, network effects often
    difficult to predict
  • Learning effects are there any? How big?
  • Dupont yes, Metal cans no

19
Strategies are commitment-intensive
  • Strategic decisions are often hard to reverse,
    due to sunk costs, inertia etc.
  • Coors regional vs. national strategy
  • Even firms with well-designed strategies can be
    adversely affected by changes in market Compaq,
    Birds Eye
  • Anticipate, dont react
  • Monitor/anticipate developments in the market
  • Dell, Enterprise luck or foresight?
  • Try to anticipate others moves
  • Extreme examples Coors vs. Dupont

20
Part I Obtaining and sustaining a competitive
advantage
  • 1. Industry analysis
  • 2. Competitive positioning and competitive
    advantage
  • 3. Horizontal and vertical scope of the firm
  • How broadly should a firm choose its activities
    beyond its core business?

21
Good and bad reasons to expand scope
  • Most expansion efforts fail! Two main reasons
  • Agency problems growth objective
  • Firms overestimate generality of their
    capabilities
  • Think of narrow focus/ outsourcing as default
  • Independent partners/suppliers have better
    incentives, are
  • better able to realize economies of scale Birds
    Eye
  • Two key questions
  • What are the synergies/economies of scope?
  • Can they be realized by contract, or is
    integration only solution?

22
Look for economies of scope
  • Efficient use of resources
  • Choice Hotels reservation system and umbrella
    branding
  • GE in sales and service for CT scanners and other
    products
  • Wal-Mart products with different seasonal
    structures
  • Benefits of co-location soft-drink bottlers and
    metal cans
  • Coordination/quality control Coors into
    everything (!?), Birds Eye
  • Pricing of complementary products/double
    marginalization Coors into cans in 1970s?
  • Benefits of bundling for buyers cross-selling at
    Choice Hotels, Wal-Mart toys and clothes

23
What about contractual solutions?
  • No need for integration if contracting is easy
  • Reservation systems in car rental, airlines
  • Output-based contracts for pea farmers etc.
  • Maybe integrate if contracting seems too
    difficult
  • Holdup problems Soft drink bottlers and
    can-making facilities Birds Eye and cold stores
  • How big are relationship-specific investments?
  • How much uncertainty about future?
  • Problems with performance measurement
    cross-selling efforts at Choice Hotels

24
Part II Strategic interaction
  • Any major strategic decision you make will likely
    provoke some kind of response from competitors
  • Use insights from game-theoretic models to
    anticipate your competitors capabilities and
    moves
  • American Airlines will competitors go along?
  • Dupont how will others respond to expansion
    plans?
  • Instant messaging what is logic of the game
    being played?
  • ValuJet how will/should Delta respond to entry?

25
Price dynamicsLogic of cooperative pricing
  • Oligopoly pricing is a Prisoners Dilemma
    situation
  • Cooperative pricing requires long enough time
    horizon
  • Key questions
  • How easy is it for firms to tacitly agree on
    prices?
  • How tempting is it for a firm to cut price?
  • How effectively can deviations be detected and
    punished?
  • Industrys ability to cooperate on prices often
    matters more than a firms relative performance
    in industry
  • Shrimp game, airline vs. cereal industry

26
Price dynamics industry factors and facilitating
practices
  • Ability to cooperate depends on industry factors.
  • Airlines transparency vs. asymmetries and excess
    capacity
  • Infant formula, RTE cereal several conducive
    factors
  • Firms can also facilitate cooperative pricing in
    a variety of ways.
  • American Airlines establish price leadership,
    increase transparency, standardize products,
    spatial pricing rules
  • PS 3, HMOs
  • Keep antitrust restrictions in mind! Price-fixing
    agreements prohibited for good reasons.

27
Strategic commitments
  • Key idea limit your own options in the future to
    influence your rivals behavior to your advantage
  • Basic ingredient of any first-mover advantage
  • Commitment is simple in theory, but hard in
    practice
  • Moving first is not a commitment
  • How costly is it to change your mind later? If
    not much, youre not committed

28
Commitment tactics
  • Sunk costs sinking costs in a useful way
    credibly increases incentives to stay in the game
  • Dupont actual construction of a new plant
  • PS 3, Capacity choice game
  • Short of true commitment, rely on reputation, or
    engage in tactics to influence rivals and
    buyers perceptions
  • Crandalls claims about commitment to Value
    pricing
  • Duponts announcements of expansion plans
  • MSNs claims about bug in AIM

29
Strategic effects anticipate competitors
responses to strategic commitments
  • E.g. if I invest in lowering costs and want to
    lower my price, how will you respond, and how
    will that affect my price profit?
  • With strategic complements (e.g. prices),
  • tough commitments have a negative strategic
    effect PS 3, export subsidy for railroad
    engines
  • soft commitments have a positive strategic
    effect ValuJet
  • With strategic substitutes (e.g. capacity), tough
    commitments have a positive strategic effect
    Dupont
  • Short-run competition is normally in price,
    long-run competition may be about capacities
    apply Cournot model

30
Entry deterrence
  • Ways to deter entry
  • Preemption Incumbent has incentive to preempt
    entry if otherwise entry is certain (efficiency
    effect)
  • CCS in plastics, Dupont, PS 3 capacity choice
    game
  • Preemption strategies are investments in a
    first-mover advantage (or dont invest EMI)
  • Any other investments that reduce entrants
    potential profits Pricing strategies to
    deter/fight entrants limit pricing, predatory
    pricing Delta vs. ValuJet
  • Antitrust law prohibits attempts to monopolize.

31
Entry games
  • For small entrants reduce incumbents incentive
    to respond aggressively
  • Judo economics stay small, differentiate
  • ValuJet
  • (Groups of) Firms may get caught up in a war of
    attrition if they fight for market in which only
    one fits
  • Another game you dont want to be in
  • Like 20 auction

32
Innovation management
  • Company that makes innovation is not necessarily
    best positioned to produce/market final product
    EMI
  • Need capabilities in production, marketing etc.
    as well
  • Options go alone, JV, license, sell
  • Normally sell innovation if its worth more to
    others than to you
  • Value of innovation is irrelevant!
  • Basic problem if I want to sell you my idea, I
    have to tell you first what it is, but then you
    already have the idea
  • Contracting may be difficult if intellectual
    property protection is weak

33
Standards
  • How strong are forces towards standardization?
  • Can competing technologies exist? Instant
    messaging yes
  • Go alone or alliance/licensing/open standard?
  • Go alone good if you (1) have a great product,
    (2) are the first mover, (3) can produce
    complementary product (if relevant)
  • AOL
  • Alliance etc good to increase chance of
    establishing own technology as standard JVC in
    VCRs, supporters of open standard in instant
    messaging
  • But how will you make money?

34
Fact-based strategy Use/collect data to inform
strategic decisions
  • Quick dirty investment analysis Coors
  • Cost benefit comparisons
  • (Simple) How is Coors positioned?
  • (Better) How large is Dells cost advantage?
  • Can Big 3 in cereal squeeze private labels by
    cutting price?
  • (Fancy) Is Duponts cost advantage big enough to
    pull off growth strategy?
  • Entry decisions
  • Is Delta pricing like a monopolist?
  • What does it take to enter the cereal industry as
    a small player?
  • Market forecasts When will CT scanner market be
    saturated, and how does that affect EMIs options?

35
Concluding remarks
  • Principles of good strategy are enduring and do
    not change with management fashions.
  • But companies are unique and must apply those
    principles to discover the optimal strategy for
    them.
  • Cookie-cutter recommendations rarely helpful
  • Economics is useful for strategy.
  • How can companies make profits in the long run?
  • Unique resources and capabilities dont come out
    of the blue
  • Ultimately, understanding how firms interact in
    markets is essential for answering the question
Write a Comment
User Comments (0)
About PowerShow.com