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Intra-Industry Investigation

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  1. Intra-Industry Analysis • Game theory • Competitor Analysis • Segmentation • Strategic Groups OUTLINE

  2. The Contribution of Game Theory to Competitive Analysis • Main value: • Framing strategic decisions as interactions between competitors • Predicting outcomes of competitive situations involving a few • players • Some key concepts: • Competition and Cooperation—Game theory can show conditions where cooperation is more advantageous than competition {P.D.} • Deterrence—changing the payoffs in the game in order to deter • a competitor from certain actions • Commitment—irrevokable deployments of resources that • give creditability to threats • Signalling—communication to influence a competitor’s decision Problems of game theory: Useful in explaining past competitive behavior—weak in predicting future competitive behavior. {SCENARIOS} What’s the problem? — Multitude of models, outcomes highly sensitive to small changes in assumptions

  3. Complementors & Competitors • Complementor: customer values your product MORE when they have the other player’s product than when they have yours alone. • Competitor: customer values your product LESS when they have the other player’s product than when they have yours alone. May cooperate to develop market & infrastructure.

  4. From Thinking Strategically • Prisoner’s Dilemma: Competitor pricing, MAD, Employer/Union, Hostage Dilemma. • To lead or not to lead: If in lead, can imitate as soon as follower’s intentions are known, or when follower’s success as been assessed. • Look before you leap - use your bargaining power when you’ve got it. • Mix your plays • Opponent’s choices & actions tell you information Monty Hall’s Let’s Make a Deal. • Pride & irrationality can’t be ignored - people. • Moving first & being intransigent. • Moving second after seeing what your opponent did. • 2 kinds of interaction: sequential & simultaneous. • For sequential, Rule #1: look forward & reason backward. Draw a game tree. • For simultaneous, build table, check for dominant strategies, (Rule #2: if you have one, use it!), then dominated strategies (Rule #3: eliminate dominated strategies), Rule #4: look for an equilibrium, a pair of strategies in which each player’s action is the best response to the others. Thinking Strategically, Dixit & Nalebuff, 1991

  5. Newcleaner’s game • If Newcleaners (N) enters and Fastcleaners accomodates, N makes $100k. • If N enters and Fastcleaners starts price war, N loses $200k. • What should N do? Thinking Strategically, Dixit & Nalebuff, 1991, p. 38

  6. Newcleaner’s game map Thinking Strategically, Dixit & Nalebuff, 1991, p. 38

  7. Larry’s choice • Larry, Mo, & Curly are in a duel and will shoot once in that order for 2 rounds. • Outcome ranking: sole survivor, then one of 2 survivors, then noone gets killed, then (& worst) you get killed. • Larry hits 30% of time, Mo 80%, Curly 100%. • What should Larry do? Thinking Strategically, Dixit & Nalebuff, 1991, p. 329

  8. David & Goliath’s choices. • David produces 1 slingshot per quarter, Goliath 2, & no flexibility in output. • Once exit industry, can’t come back in. Thinking Strategically, Dixit & Nalebuff, 1991, p. 340

  9. Thinking Strategically, Dixit & Nalebuff, 1991, p.343

  10. What Price a Dollar? • Bidding proceeds at 5 cent increments. • Highest bidder gets the dollar. • The highest AND the second highest bidder must pay their bid. Thinking Strategically, Dixit & Nalebuff, 1991, p. 349

  11. From Co-opetition • Players: when you enter a game, you change it. Get paid to play. • Added Value: Size of the pie when you are in MINUS size of pie when you are out. Red & Black card pair = $100. • Rules: w/ customers, suppliers, government sets many, changing. Most Favored Customer clause. • Tactics: Actions to your benefit. • Scope: Boundaries of the game. Co-opetition, Brandenburger & Nalebuff, 1996

  12. Value Net Co-opetition, Brandenburger & Nalebuff, 1996

  13. University Value Net Co-opetition, Brandenburger & Nalebuff, 1996

  14. Co-opetition, Brandenburger & Nalebuff, 1996

  15. A Framework for Competitor Analysis OBJECTIVES What are competitor’s current goals? Is performance meeting there goals? How are its goals likely to change? STRATEGY How is the firm competing? • PREDICTIONS • What strategy changes • will the competitor • initiate? • How will the competitor • respond to our strategic • initiatives? ASSUMPTIONS What assumptions does the competitor hold about the industry and itself? RESOURCES & CAPABILITIES What are the competitors’ key strengths and weaknesses? {Sources of information}

  16. Segmentation Analysis: The Principal Stages • Identify key variables and categories. • Construct a segmentation matrix • Analyze segment attractiveness • Identify KSFs in each segment • Analyze benefits of broad vs. narrow scope. Identify segmentation variables Reduce to 2 or 3 variables Identify discrete categories for each variable Potential for economies of scope across segments Similarity of KSFs Product differentiation benefits of segment focus

  17. *Size *Technical sophistication *OEM/replacement The Basis for Segmentation: Customer and Product Characteristics Industrial buyers Characteristics of the Buyers *Demographics *Lifestyle *Purchase occasion Household buyers *Size *Distributor/broker *Exclusive/ nonexclusive *General/special list Distribution channel Opportunities for Differentiation Geographical location *Physical size *Price level *Product features *Technology design *Inputs used (e.g. raw materials) *Performance characteristics *Pre-sales & post-sales services Characteristics of the Product

  18. Segmenting the European Metal Can Industry

  19. Segmenting the World Automobile Market REGION US& Canada W.Europe E.Europe Asia Lat America Australia Africa Luxury Cars Full-size sedans Mid-size sedans Small sedans Station wagons Passenger minivans Sports cars Sport-utility Pick-up trucks

  20. Vertical Segmentation & Industry Profit Pools —The US Auto Industry 25% 20 Service & repair Leasing Operating margin 15 Warranty Aftermarket parts Auto manufacturing 10 Auto rental Auto insurance Auto loans New car dealers 5 Used car dealers 0 Gasoline 100% 0 Share of industry revenue

  21. SEGMENT Segmentation and Key Success Factors in the U.S. Bicycle Industry KEY SUCCESS FACTORS * Low-costs through global sourcing of components & low-wage assembly. * Supply contract with major retailer. Leading competitors: Taiwanese & Chinese assemblers, some U.S manufacturers, e.g. Murray Ohio, Huffy Low price bicycles sold primarily through department and discount stores, mainly under the retailer’s own brand (e.g. Sears’ “Free Spirit”); *Cost efficiency through large scale operation and either low wages or automated manufacturing. *Reputation for quality (durability, reliability) through effective marketing to dealers and/or consumers. * International marketing & distribution. Leading competitors: Raleigh, Giant, Peugeot, Fuji Medium-priced bicycles sold primarily under manufacturer’s brand name and distributed mainly through specialist bicycles stores; Focus vs. Broad, Branding *Quality of components and assembly, Innovation in design (e.g. minimizing weight and wind resistance). *Reputation (e.g. through success in racing, through effective brand management). *Strong dealer relations. High-priced bicycles for enthusiasts. Children’s bicycles (and tricycles) sold primarily through toy retailers (discount toy stores, department stores, and specialist toy stores). Similar to low-price bicycle segment.

  22. Strategic Group Analysis A strategic group is a group of firms in an industry following the same or similar strategy. • Identifying strategic groups: • Identify principal strategic • variables which distinguish • firms. • Position each firm in relation • to these variables. • Identify clusters.

  23. Strategic Groups in the World Automobile Industry Broad GLOBAL, BROAD-LINE PRODUCERS e.g., GM, Ford, Toyota, Nissan, Honda, VW, Daimler Chrysler REGIONALLY-FOCUSED BROAD-LINE PRODUCERS e.g. Fiat, PSA, Renault, GLOBAL SUPPLIERS OF NARROW MODEL RANGE e.g., Volvo, Subaru, Isuzu, Suzuki, Saab, Hyundai NATIONALLY FOCUSED, INTERMEDIATE LINE PRODUCERS e.g. Tofas, Kia, Proton, Maruti PRODUCT RANGE LUXURY CAR MANUFACTURERS e.g., Jaguar, Rolls Royce, BMW NATIONALLY- FOCUSED, SMALL, SPECIALIST PRODUCERS e.g., Bristol (U.K.), Classic Roadsters (U.S.), Morgan (U.K.) PERFORMANCE CAR PRODUCERS e.g., Porsche, Maserati, Lotus Narrow National GEOGRAPHICAL SCOPE Global

  24. Strategic Groups Within the World Petroleum Industry INTERNATIONAL UPSTREAM COMPANIES INTEGRATED OIL MAJORS INTERNATIONAL UPSTREAM, REGIONALLY FOCUSED DOWNSTREAM Premier Oil Enterprise Kuwait Petroleum PDVSA INTEGRATED DOMESTIC OIL COMPANIES • NATIONAL • PRODUCTION • COMPANIES Iran NOC 0 0.5 1.0 1.5 2.0 Statoil BP-Amoco Exxon -Mobil Vertical Balance INTEGRATED INTERNATIONAL MAJORS Pemex Petronas Chevron Royal Dutch -Shell Gp. Phillips ENI Elf-Fina-Total Repsol YPF Indian Oil Phillips Texaco Petrobras ENI INTERNATIONAL DOWNSTREAM OIL COMPANIES Repsol Nippon E.g. Neste Tosco 0 10 20 30 40 50 60 70 80 NATIONALLY-FOCUSED DOWNSTREAM COMPANIES Geographical Scope