CH8: Dynamics of competition IB

Question 1

strategy

Answer 1

a set of objectives and action that help to achieve those objectives

Question 2

oligopoly competition?

Answer 2

firms do not compete on price but by strategy

Question 3

competitive dynamics

Answer 3

Competitive dynamics is a term used to describe a gamut of actions and reactions of firms taking part in a competitive business environment

Question 4

competitor analysis

Answer 4

identifying your competitors and evaluating their strategies to determine their strengths and weaknesses relative to those of your own product or service.

Question 5

attack

Answer 5

an initial set of actions in order to gain a competitive advantage with the aim to yield a stronger position

Question 6

AMC framework

Answer 6

Awareness
Motivation
Capability

indicates when firms are likely to attack and counter-attack each other

Question 7

Awareness

Answer 7

If the attack is too subtle the rivals doesn’t notice

Question 8

blue ocean strategy

Answer 8

Blue oceans offer the opposite. Many firms choose to innovate or expand in the hopes of finding a blue ocean market with uncontested competition. Blue ocean markets are also of high interest to entrepreneurs. Overall, blue ocean markets have several characteristics that innovators and entrepreneurs love.

A pure blue ocean market has no competitors. Business leaders with innovative products and services who can identify blue ocean markets have endless opportunities. A blue ocean market business leader has first-mover advantages, cost advantages in marketing with no competition, the ability to set prices without competitive constraints, and the flexibility to take its offering in various directions.

Question 9

Red ocean

Answer 9

In an established industry, companies compete with each other for every piece of available market share. The competition is often so intense that some firms cannot sustain themselves. This type of industry describes a red ocean, representing a saturated market share bloodied by competition.

Question 10

Motivation

Answer 10

Rivals will launch a counter -attack if long-term benefits are expected.
Firms operating in a competitive environment have stronger incentives to react to an attack.

Question 11

Capability

Answer 11

firms with strong financial resources are able to make critical investments to be able to take part in price wars

Question 12

Do competing firms have an incentive to engage in collusion?

Answer 12

YES. This will reduce competition

Question 13

Tacit collusion

Answer 13

firms indirectly coordinate actions by signaling their intentions to reduce output and maintain pricing above competitive levels

Question 14

Explicit collusion

Answer 14

firms directly negotiate output, fix pricing and divide markets

Question 15

What does explicit collusion lead to?

Answer 15

An illegal cartel. This is an entity that engages in output- and price-fixing, which involves multiple competitors

Question 16

repeated game

Answer 16

situation remains the same over several periods of time

Question 17

prisoner’s dilemma

Answer 17

a type of game in which the outcome depends on two parties deciding whether to cooperate or to defect

Question 18

tit-for-tat

Answer 18

strategy of matching the competitor’s move with an either aggressive or accommodative reaction

Question 19

5 factors that describe which industries are conductive to collusion

Answer 19

1. Concentration ratio
2. Price leaser
3. Homogenous products
4. high entry barriers for new entrants
5. Multimarket competition

Question 20

1. Concentration ratio

Answer 20

percentage of total industry sales accounted for by the top firms. The higher the concentration the easier to organize collusion

Question 21

2. Price leaser

Answer 21

Price leader needs to have the capacity to punish so possess sufficient resources to deter and combat defection (Treuebruch).

Question 22

3. Homogenous products

Answer 22

In an industry with equal products, rivals are forced to compete on price. This means that it is easier to collude and also easier to observe if rivals stick to the agreement.

Question 23

4. high entry barriers for new entrants

Answer 23

In an industry with high barriers for new entrants it is easier to collude. New entrants are likely to ignore the existing industry order and introduce less homogenous products with newer technologies.

Question 24

5. Multimarket competition

Answer 24

occurs when firms engage the same rivals in
multiple markets. Multimarket firms may respect their rivals’ spheres of influence
in certain markets, and their rivals may reciprocate (etw. erwidern) , leading to tacit collusion.
Deterrence is important if there is high market commonality. Because otherwise cross-market retaliation can take place which is costly.

Question 25

market commonality

Answer 25

Market commonality can be defined as the number and significance of markets that a firm competes in with rivals.

Question 26

cross-market retaliation

Answer 26

Retaliatory attacks on a competitor’s other markets if this competitor attacks a firm’s original market.

Question 27

competition policy/ anti-trust policy

Answer 27

policies that monitor competition

Question 28

leniency programmes

Answer 28

give immunity to members of a cartel that first report the cartel to the authorities

Question 29

market division collusion

Answer 29

firms divide their markets

Question 30

predatory pricing

Answer 30

monopolize a market by setting prices below cost with the intention to raise price to cover losses in the long run after eliminating rivals

Question 31

dumping

Answer 31

exporter selling below cost abroad and planning to raise prices after eliminating local rivals

Question 32

VRIO

Answer 32

Value-creation
Rarity
Imitability
Organization

resources meeting these criteria are necessary for long -term success in a competitive battle

Question 33

Value-creation

Answer 33

“Is the firm able to exploit an opportunity or neutralize an external threat with the resource/capability?”

Question 34

Rarity

Answer 34

“Is control of the resource/capability in the hands of a relative few?”

Question 35

Imitability

Answer 35

“Is it difficult to imitate, and will there be significant cost disadvantage to a firm trying to obtain, develop, or duplicate the resource/capability?”

Question 36

Organization

Answer 36

“Is the firm organized, ready, and able to exploit the resource/capability?” “Is the firm organized to capture value?”

Question 37

Survival strategies

Answer 37

are designed to ensure survival by liquidity and positive cash flow.
During a recession companies should focus on value for money products

Question 38

contingency plans

Answer 38

plans devised for specific situations when things could go wrong

Question 39

4 strategic postures for small firms vs. MNEs

Answer 39

1. Dodger
2. Contender
3. Defender
4. Extender

Question 40

1. Dodger

Answer 40

Industry Pressure to Globalize is high.

centers on cooperation through joint ventures with MNRs and sell-offs to MNEs. (Customized to home markets)

Question 41

2. Contender (Herausforderer)

Answer 41

Industry Pressure to Globalize is high.

engaging in rapid learning and then expanding overseas. Transferable abroad

Question 42

3. Defender

Answer 42

When pressure for globalization is low
Leveraging local assets in areas in which MNEs are weak.
Competition in regional and domestic markets. Customized to home markets.

Question 43

4. Extender

Answer 43

Low pressure for globalization, but firms have transferable skills
Leverage home-grown skills abroad.
Transferable abroad

Question 44

Example of asset specificity

Answer 44

In the late 1980s, The NutraSweet Company was the largest producer
of the artificial sweetened aspartam by volume was for diet soft drinks, making CocaCola and Pepsi the largest buyers. The investment in aspartame capacity by The
NutraSweet Company is therefore an example or dedicated assets.