Competitive Dynamics Flashcards
The pay-off of a strategy depends on the alignment or congruence among:
- Strategic choices
- Internal resources
- Structural forces
- Competitive dynamics
Competitive dynamics = how to get this alignment
Fishing Village Example:
In a small fishing village rival boat-builders compete to supply fisherman.
- They have passed their skills down from one generation to the next.
- They create value for fisherman— who would otherwise be unable to go to sea
- However, they capture little of this value because their boats have homogeneous capabilities (so fishermen bargain hard)
One of the local boat- builders, the Innovator (I), introduces a new stronger design, allowing Fishermen to sail safely into much deeper waters, where the catch is consistently more plentiful. Results:
- Demands is tremendous
- I can sell at a much higher price
- I keeps the building techniques for her design a closely guarded secret
‘I’ Hasn’t Succeeded Alone:
- Woodcutter (W) provides a special timber that requires a process that I and W have jointly developed
- Sailmaker (S) provides rugged materials and stitching to cope with stronger winds that come with the boat’s deep sea range. The sails require more frequent repair and replacement, providing S with a steady stream of business
Market Impact of I-W-S’s Innovation:
- As I, W, and S’s sales increase rapidly, rival boat-builders see their business shrink dramatically
- A closer look at the organization and functioning of the fishing village market highlights the newly introduced outrigger:
- It has changed value creation and distribution within the market
- Surely, it will trigger competitors’ responses (e.g., product
- It heavily draws on cooperative ties—among I, W, and S—that can or cannot be sustainable in the future
Strategic Interaction Types
- Value creation: How big is the pie? What would make the pie bigger?
- Value capture: How will we divide the pie? Am I getting my fair share or more than my fair share?
- Competitive interaction: How might others shrink the pie or my share of it?
- Cooperative interaction: How might I work with others to make the pie—or my share of it—bigger?
Strategic Interaction along the 2D continuum:
First Dimension:
Value creation – value capture: impact of the interaction between firms A and B on:
- The size of the ‘pie’
- The distribution of the ‘pie’
Second Dimension:
Competition - Cooperation: A’s business model impact on B’s ability to:
- Create value
- Capture value
Cooperation and competition are not rigid boxes:
- Competition and cooperation are mirror-image concepts, and both must be incorporated into strategy.
- A given relationship may be manifested in more than one quadrant in the matrix. A cooperative dynamic can also be competitive, and vice versa.
- Co-opetition: Cooperation and competition can co-exist in the same interaction!
Game of strategic interaction 1st Step: Added Value
Game of strategic interaction 2nd Step: Anticipating the Game
There are three analytical tools to try to anticipate the game:
- Analysis of interdependencies: What choices can each player make and what are the consequences of those choices for other players?
- Player analysis: How does each player see its world and its choices?
- Game theory: What are the economic outcomes of various scenarios, and how do they affect each players likely choices?
Analysis of interdependencies:
The exact points at which the business model of one firm touches the business model of another. Forces the strategist to ask the following questions:
- What key choices and consequences in our business models will shape the game?
- What can we do against each other, and what can we do with each other?
Understanding business models and their interdependencies may determine what game is most likely to be played— competitive; cooperative; or, as is often the case, a mix of the two and what plays should be considered.
Complementors =
Companies in one industry whose products or services increase the value of products or services of companies in another industry.
Interactive Simulation 1: Innovator’s business model
- Diagram depicts a firm’s key choices and their consequences
- Together, the choices and consequences should represent the economic logic, or business model, of the firm
- A full rotation of the green dots represents a quarter year
- Shows how the boatbuilder’s profits over time are affected by her choices about pricing and product improvements (R&D spending, price, exclusive relationships with supplier and complementor)
Should Innovator (I) have an exclusive relationship with complementor (C) [the Sailmaker] and supplier (S) [the Woodcutter]?
Yes.
higher quality => higher WTP => lower unit sales but higher profit => higher spend on R&D => higher quality…
Should price increase or decrease? (all other things constant)
Increase. As the manufacturer has the monopoly, it will not affect sales.
higher spend on R&D => higher quality => higher WTP => lower unit sales but higher profit => higher spend on R&D
Should R&D spending be low or high when price is low/average/high?
- Low price: profit will be low w/ low R&D spending because of low WTP. Same for high R&D but higher WTP and unit sales
- Average price: profit will be good but not optimized with low R&D. Same w/ high R&D (but slightly higher WTP and unit sales)
- High price: needs high R&D spending or there will be no WTP
Business Simulation Take-Aways:
- By investing in the outrigger design and building a strong ecosystem with S and W**, **I has created a superior product for which fishermen are willing to pay a premium
- I’s business model sets off a virtuous cycle, enabling her to invest in new generations of outriggers and thus reinforcing her advantage
- As long as the I, W, and S cooperate and minimize any competition for the pie, it will be difficult for others to copy them and claim a share of the value
- Thus, several of her rivals drop out of boat building completely, perhaps becoming fishermen themselves.
Interdependencies: Intel – MS Example
One of the remaining boatbuilders in the village, a Newbie (N), cracks the code to the Innovator’s design and enters the market!!
What are the 2 possible scenarios?
- Scenario 1: N enters market & I cuts prices
- Scenario 2: N enters market, I accepts situation
Game of strategic interaction 3rd step: Preparing for the game:
Player analysis
Analysing business models and their interdependencies is not enough—other players may have distinct perspectives or goals that might shape their choices.
The purpose of player analysis is to develop insights into the following questions:
- What is the other player’s perspective on its potential choices?
- Will this perspective lead it to a particular choice?
Porter’s integrative framework for Player Analysis: