Uploaded by Javier Fernández Fernández-Moris

Lecture 7

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22nd November 2017
Lecture 7 IB: Competitive dynamics and MNEs
Lecture 7: Competitive dynamics and MNEs.
Outline
- Structure-conduct-performance paradigm
- Alternative market structures
- Evolution of industries over time with reference to the industry life-cycle
model.
- Porter’s five forces model - a primary technique to analyze competition in an
industry environment
- Dynamics of competition/market structure and collusion
- Strategic implications of market structures
- Business-level strategies and the industry environment
Structure-conduct-performance paradigm
- Determines a firm’s behaviour
- Structural factors
o Amount of actual competition
o Potential competition (entry barriers)
- Conduct factors
o Pricing policy
o Amount of advertising
o Mergers & Acquisitions
o Product differentiation
- Performance factors
o Profitability
Market Structures
- Classifying markets (by degree of competition)
o number of firms
o freedom of entry to industry
 free, restricted or blocked?
o nature of product
 homogeneous or differentiated?
o nature of demand curve
 degree of control the firm has over price
Features of the four market structures
Type of
market
Number
of firms
Freedom of
entry
Nature of
product
Examples
Implications for
demand curve
faced by firm
Perfect
competition
Very
many
Unrestricted
Homogeneous
(undifferentiated)
Agricultural
products
Horizontal:
firm is a price taker
Monopolistic
competition
Many /
several
Unrestricted
Differentiated
Builders,
restaurants
Downward sloping,
but relatively
elastic
Undifferentiated
Supermarkets
Oligopoly
Few
Restricted
or differentiated
cars, electrical
appliances
Downward sloping.
Relatively inelastic
(shape depends on
reactions of rivals)
Monopoly
One
Restricted or
completely
blocked
Unique
Local water
company, train
operators (over
particular routes)
Downward sloping:
more inelastic than
oligopoly. Firm has
considerable
control over price
Lecture 7 IB: Competitive dynamics and MNEs
22nd November 2017
Defining an industry
- Industry: Group of companies offering products or services that are close
substitutes for each other
- Sector: Group of closely related industries
- Market segments - Distinct groups of customers within a market that can be
differentiated on the basis of their:
o Individual attributes
o Specific demands
An example of the computer sector: (industries and segments)
STRATEGIC GROUPS WITHIN INDUSTRIES
- Companies in an industry differ in the way they strategically position products
in the market
- Product positioning is determined by the:
o Product quality, distribution channels and market segments served
o Technological leadership and customer service
o Pricing and advertising policy
o Promotions offered
Strategic groups in the commercial aerospace industry
Lecture 7 IB: Competitive dynamics and MNEs
22nd November 2017
Implications of Strategic Groups
- Since all companies in a strategic group pursue a similar strategy:
o Customers view them as direct substitutes for each other
o Immediate threat to a company are rivals within its own strategic group
- Different strategic groups have different relationships to each of the
competitive forces
Mobility Barriers
- Within-industry factors that inhibit the movement of companies between
strategic groups
- Managers must:
o Determine if it is cost-effective to overcome mobility barriers
o Realize that companies in other strategic groups become their
competitors if they overcome mobility barriers
Stages in the industry life cycle
Strategies to Deter Entry in mature industries
Strategy Selection in a Declining Industry
Lecture 7 IB: Competitive dynamics and MNEs
22nd November 2017
Strategies in a declining industry
- Leadership strategy: When a company develops strategies to become the
dominant player in a declining industry
- Niche strategy: When a company focuses on pockets of demand that are
declining more slowly than the industry as a whole to maintain profitability
- Harvest strategy: When a company reduces to a minimum the assets it
employs in a business to reduce its cost structure and extract maximum profits
from its investment
- Divestment strategy: When a company decides to exit an industry by selling off
its business assets to another company
Market development and customer groups
Limitations of Models for Industry Analysis
- Life-cycle issues
o Industries do not always follow the pattern of the industry life-cycle
model
o Time span of the stages vary from industry to industry
- Innovation
o Punctuated equilibrium - Long periods of equilibrium are punctuated by
periods of rapid change
Punctuated equilibrium and competitive structure
Lecture 7 IB: Competitive dynamics and MNEs
22nd November 2017
Limitations of Models for Industry Analysis
- Because competitive forces and strategic group models are static, they cannot
capture periods of rapid change in the industry environment when value is
migrating
 Company differences
o Overemphasize importance of industry structure as a determinant of
company performance
o Underemphasize importance of variations among companies within a
strategic group
Porter’s competitive forces
Porter Five Forces Model
- The model as explained by the author!
https://www.youtube.com/watch?v=mYF2_FBCvXw
Competitive dynamics
- Attack is an initial set of actions to gain competitive Advantage
- Counter-attack is a set of actions in response to an attack.
o Example: Huawei vs. Cisco
- Awareness, motivation, capability (AMC) framework
o A conceptual framework indicating when firms are likely to attack and
counter-attack each other.
o Blue ocean strategy: A strategy of attack that avoids
direct confrontation.
 Example: Haier’s entry into the US white goods
market -> entering a low-profile segment
o Minimizing the awareness, motivation and capabilities
of the opponents is more likely to result in successful
attacks
Lecture 7 IB: Competitive dynamics and MNEs
22nd November 2017
Collude or Not
- Collusion is collective attempts between competing firms to reduce
competition.
- Tacit collusion
o Firms indirectly coordinate actions by signalling their intention to
reduce output and maintain pricing above competitive levels.
- Explicit collusion
o Firms directly negotiate output, fix pricing and divide markets.
- Cartel
o An entity that engages in output- and price-fixing, involving multiple
competitors.
- Prisoners’ dilemma
o In game theory, a type of game in which the outcome depends on two
parties deciding whether to cooperate or to defect.
A prisoners’ dilemma for airlines
Industry characteristics and possibility of collusion
- Concentration ratio
- Price leader is a firm that has a dominant market share and sets ‘acceptable’
prices and margins in the industry.
- Capacity to punish is sufficient resources possessed by a price leader to deter
and combat defection.
Lecture 7 IB: Competitive dynamics and MNEs
22nd November 2017
Strategies to Manage Rivalry
Strategies to Manage Rivalry: non-price competition
Business-level strategy
- Way a company positions itself in the marketplace to gain a competitive
advantage
- Different positioning strategies that can be used in different industry settings:
o Low cost position
o Product Differentiation
o Value Innovation
o Market Segmentation
The differentiation-low cost tradeoff
Lecture 7 IB: Competitive dynamics and MNEs
22nd November 2017
Value innovation
- Occurs when innovations push out the efficiency frontier in an industry,
enabling greater value to be offered through superior differentiation
o At a lower cost than was thought possible (e.g. Dell creating value
through customization)
- Enable a company to outperform its rivals for a long period of time
Market segmentation
- Decision of a company to group customers based on important differences in
their needs to gain a competitive advantage
o Standardization strategy: Producing a standardized product for the
average customer, ignoring different segments
o Segmentation strategy: Producing different offerings for different
segments, serving many segments or the entire market
o Focus strategy: Serving a limited number of segments or just one
segment
Comparison of Market segmentation approaches
Business-level strategies summary
Lecture 7 IB: Competitive dynamics and MNEs
22nd November 2017
Further readings
- Peng, M. and Meyer, K. (2011) Chapter 13.
- Hill et al. (2014), Chapter 2, pp.45-70; chapters 5 & 6 on the competitive
positioning and business-level strategies
- Porter, M.E. (Jan 2008) “The five competitive industry that shape strategy,
http://hbr.org/product/the-five-competitive-forces-that-shapestrategy/an/R0801E-PDF-ENG (please note you must register on HBR site to be
able to read this article in full)
Additional readings
- Sloman, J., K. Hinde and D. Garratt (2010) Economics for Business, 5th ed.,
Prentice Hall: London,chs 11-12 – on market structures
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