CH8: Dynamics of competition IB Flashcards
strategy
a set of objectives and action that help to achieve those objectives
oligopoly competition?
firms do not compete on price but by strategy
competitive dynamics
Competitive dynamics is a term used to describe a gamut of actions and reactions of firms taking part in a competitive business environment
competitor analysis
identifying your competitors and evaluating their strategies to determine their strengths and weaknesses relative to those of your own product or service.
attack
an initial set of actions in order to gain a competitive advantage with the aim to yield a stronger position
AMC framework
Awareness
Motivation
Capability
indicates when firms are likely to attack and counter-attack each other
Awareness
If the attack is too subtle the rivals doesn’t notice
blue ocean strategy
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.
Red ocean
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.
Motivation
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.
Capability
firms with strong financial resources are able to make critical investments to be able to take part in price wars
Do competing firms have an incentive to engage in collusion?
YES. This will reduce competition
Tacit collusion
firms indirectly coordinate actions by signaling their intentions to reduce output and maintain pricing above competitive levels
Explicit collusion
firms directly negotiate output, fix pricing and divide markets
What does explicit collusion lead to?
An illegal cartel. This is an entity that engages in output- and price-fixing, which involves multiple competitors
repeated game
situation remains the same over several periods of time
prisoner’s dilemma
a type of game in which the outcome depends on two parties deciding whether to cooperate or to defect
tit-for-tat
strategy of matching the competitor’s move with an either aggressive or accommodative reaction
5 factors that describe which industries are conductive to collusion
- Concentration ratio
- Price leaser
- Homogenous products
- high entry barriers for new entrants
- Multimarket competition
- Concentration ratio
percentage of total industry sales accounted for by the top firms. The higher the concentration the easier to organize collusion
- Price leaser
Price leader needs to have the capacity to punish so possess sufficient resources to deter and combat defection (Treuebruch).
- Homogenous products
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.
- high entry barriers for new entrants
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.
- Multimarket competition
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.
market commonality
Market commonality can be defined as the number and significance of markets that a firm competes in with rivals.
cross-market retaliation
Retaliatory attacks on a competitor’s other markets if this competitor attacks a firm’s original market.
competition policy/ anti-trust policy
policies that monitor competition
leniency programmes
give immunity to members of a cartel that first report the cartel to the authorities
market division collusion
firms divide their markets
predatory pricing
monopolize a market by setting prices below cost with the intention to raise price to cover losses in the long run after eliminating rivals
dumping
exporter selling below cost abroad and planning to raise prices after eliminating local rivals
VRIO
Value-creation
Rarity
Imitability
Organization
resources meeting these criteria are necessary for long -term success in a competitive battle
Value-creation
“Is the firm able to exploit an opportunity or neutralize an external threat with the resource/capability?”
Rarity
“Is control of the resource/capability in the hands of a relative few?”
Imitability
“Is it difficult to imitate, and will there be significant cost disadvantage to a firm trying to obtain, develop, or duplicate the resource/capability?”
Organization
“Is the firm organized, ready, and able to exploit the resource/capability?” “Is the firm organized to capture value?”
Survival strategies
are designed to ensure survival by liquidity and positive cash flow.
During a recession companies should focus on value for money products
contingency plans
plans devised for specific situations when things could go wrong
4 strategic postures for small firms vs. MNEs
- Dodger
- Contender
- Defender
- Extender
- Dodger
Industry Pressure to Globalize is high.
centers on cooperation through joint ventures with MNRs and sell-offs to MNEs. (Customized to home markets)
- Contender (Herausforderer)
Industry Pressure to Globalize is high.
engaging in rapid learning and then expanding overseas. Transferable abroad
- Defender
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.
- Extender
Low pressure for globalization, but firms have transferable skills
Leverage home-grown skills abroad.
Transferable abroad
Example of asset specificity
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.
