Competitive Strategy Chapter 4 New Market Entry

Attractivenss of new market entry => Choice of market => Choice of entry type => Entry strategy
Structural Entry Barriers
Factors that allow incumbent firms to earn positive economic profits, while making it unprofitable for newcomers to enter the industry
Structural & Strategic barriers.
1. Control over natural resources.
2. Supplier capacity.
3. Location
4. Economies of scale, economies of learnings.
5. Marketing advantages of incumbents.
6. Customer Loyalty
Strategic Entry Barriers
Maket Entry
Types of commitment
1. High sunk cost investments.
     Production Capacity.
     R&D.
     Advertising.
2. Exit from other strategic market segments and focus on entry.
e.g. Bloomberg
a. Innovators enter the market with inferior products which appeal to price-sensitive buyers.
b. Incumbents ignore the threat since mainstream customers don’t want those products.
c. Over time the products improve and take large chunks of the market from the incumbents.
d. market leaders can hardly respond because they find it difficult to replicate entrants’ low-cost business models.
Judo Economics
can only work when it is better for the incumbent to lose some market share to the entrant rather than to start a price war and fight back the market share for the entrant.
This is only the case if
a. The entrant has a production capacity that can serve a limited portion of the market only and the incumbent does not fear that the entrant wants to take over bigger portions of the market.
b. The incumbent has a big share of the market and would lose lots of profit when reducing the own price for all of its customers to undercut the entrant’s price.
c. The difference between the price of the entrant and pre-entry price of the incumbent is high, so that it hurts the incumbent to lower prices for all of its customers.
Commitment
Limit Pricing/Predatory Pricing
     * low demand
     * low cost incumbent
Pre-emption

Competitive Strategy Chapter 2 Soft Cooperative Commitment

Reputation building is a form of cooperative commitment. ( With soft commitment, companies try to build a reputation as a fair and cooperative player – in the hope that the competitors treat the company in a fair and cooperative way.)
Implementing a most favoured customer clause is a form of cooperative commitment: With such a clause you cannot easily reduce prices in a specific market segment or region in order to fight for market share with a competitor. Once you reduce prices in a specific market segment or region, you have to offer the same price to every other customer and refund the price difference to those who have bought your product earlier on. This is they price wars become very costly and hence less likely. Because the other market participants do no suffer from implementing such a  clause. It is a soft rather than an aggressive commitment.
A self binding commitment is another form of cooperative commitment: You make a binding decision such as particular investment that eliminates those moves/actions which would lead to fierce competition. The other market participants do no suffer from this decision.
The most favored customer clause says that every customer gets the same price. If the company decreases its price, customers who bought the product previously at a higher price get refunded. Hence, if the company decreases its price, e.g. to fight back a certain group of customers with heavy price cuts, the company has to reduce its price also for all the other customers and refund previous buyers. This makes price cuts very expensive and reduces the likelihood of a price war.

Competitive Strategy Chapter 6 Designing products wisely

Bertrand paradox.
   a model prediction in which two firms in the same market reach a Nash equilibrium where both firms charge a price equal to marginal cost. If either firm were to lower its price it would gain the whole market and substantially larger profits. Since both companies know this, they will each try to undercut their competitor until the products are selling at zero profits. There paradox is that firms usually make positive profits in reality.
Differentiation is beneficial if consumer preferences are heterogeneous.
* Technical features.
* Durability
* Resale value
* Taste/Image
* Location
Horizontal differentiation/ Vertical differentiation. (Color/Mileage)
* Given equal prices, some consumers would choose product A whereas others would choose product B.
* Given equal prices, every consumer would choose product A over product B.
(i3, i5, i7 cpus <-> OEM makeer; economy, business, first class seats)
HORIZONTAL DIFFERENTIATION
Hotelling Bertrand model. Highly relevant for analysing product differentiation.
* Three generic strategies for creating a defendable position and outperforming competitors in an industry.
* These required different organisational arrangements, control procedures, incentive systems and resources.
Cost – Leadership
* Low-cost relative to competitors as strategic main theme
* Central elements of the strategy
     * Efficient-scale facilities
     * Rigorous cost reductions from experience.
     * Avoidance of marginal customer accounts.
Differentiation
* Differentiating the product or service, offering something that is perceived industry-wide as being unique
* Exemplary forms of differentiation
     * Design or brand image
     * Technology
     * Customer service
* Differentiation along multiple dimensions
Focus
* Focus on particular buyer group, segment of the product line or geographic market.
* Central rationale: Serving narrow strategic target group more effectively or efficiently than competitors.
* Lower costs or more differentiation with regard to single niche.
Stuck in the middle.
Firms that fail to develop their strategy in at least one of the three directions are in poor strategic position
* Firms lack the market share, capital investment, and resolve to “play the low-cost game”.
* Firms lack industry-wide differentiation to obviate the need for a lost cost position.
* Firms lack focus to create differentiation or low-cost position.
Ambidexterity
* Stuck in the middle does not mean that firms cannot pursue multiple strategies simultaneously.
* The pursuit of hybrid/ambidextrous strategies might lead to better results that following pure strategies.
* But tensions within organization need to be managed.

Competitive Strategy Chapter 1 Taking Care of Your Competition

In finite games it is clear from the beginning how often the game is repeated and when it ends.
If the outcome of a game is determined by the fact that in the last stage of the game there is no further threat of retaliation, this is called end game effect.
Because of the endgame effect, each period is treated as it would be the last period of the game. This results in the fact that each stage of the game is treated equally and hence the equilibrium of the game is the same in each stage of the game.
Interest Rat <-> Cartel
If the interest rate goes down, future payoffs are less relevant – or put it differently, it is less costly to replicate payoffs in the future with money that is earned today. Hence, the players are less worried about being punished in the future, and deviating is getting relatively more attractive.
Aggressive commitment
* Eliminate unattractive equilibria
* Change simultaneous game to sequential one.
Dominated Strategy
A strategy is dominated if, regardless of what the other player does, the strategy earns the player a smaller payoff than some other strategy. Hence, a strategy is dominated if it is always better to play some other strategy, regardless of what the opponent may do.
A Nash Equilibrium is a set of strategies, one for the player and his/her opponent, that represents the best responses to each other.
Which are the important parts of a game (in context of game theory)?
a) How many players are there and who are they?
b) What are the possible actions these players can opt for?
c) What are the payoffs related to the different combinations of actions?
d) What are the rules of the game?
=> Matrix => Structured Analysis
Nash Equilibrium
* A combination of strategies
* No player can deviate unilaterally from his/her current strategy
* To improve his/her payoffs
A game can contain no Nash Equilibrium at all, one Nash Equilibrium or several Nash Equilibria.

Business Strategy Chapter 9 Diversification Matrices

More acceptable reasons for diversification these days are the potential for operational and strategic benefits.
(1) eliminating and preventing competition by subsidizing a price war,
(2) reducing rivalry through mutual forbearance, and
(3) raising rivals’ costs through vertical foreclosure.
Vertical foreclosure
Residue rights of control

Business Strategy Chapter 8 Strategy Maps

Broadly speaking, there are two types of competitive advantage a firm may pursue: low cost or uniqueness
Firms may choose to target a broader or narrower segment of the market. Most markets can be segmented into smaller product markets defined by geography, buyer characteristics (e.g., age, race, income, and gender), and other product line characteristics.
These two dimensions, broad versus narrow and low cost versus unique, define four generic strategies:
1. Broad-scope, low-cost players are referred to as cost leaders
2. Broad-scope, unique players are referred to as differentiated players
3. On the narrow side, we have both focused, low-cost players and differentiated niche players.
4. Some firms pursue generic strategies that cross these boundaries.

Business Strategy Chapter 7 Capabilities Analysis

major sets of activities, skills, and resources that drive value to customers.
 at the time of strategy formulation, when firms are assessing which strategic options are currently feasible—and may be included in a broader process of determining strengths, weaknesses, opportunities, and threats (SWOT).
 capabilities analysis can be used to determine which capabilities are perhaps non-core and therefore candidates for outsourcing or external partnering.
 Truly understanding a firm’s competitive strengths requires more than just an understanding of that organization’s tangible assets. Indeed, the key building blocks of competitive advantage are often more likely to involve the firm’s intangible assets.
Capabilities analysis is based on the resource-based view (RBV) of strategy that emphasizes the internal skills and resources of the firm.  The RBV asserts that resources and capabilities can be a source of competitive advantage when they are (a) valuable, (b) rare, (c) inimitable, and (d) non-substitutable.
Step 1. Determine the value chain for your business. (bargaining power, capabilities, partners, and defensibility.)
Step 2. Isolate the core set of capabilities.
     Step 2a. Processes.
     Step 2b. People. ( (a) most central to value creation and (b) unique and difficult to replace. )
     Step 2c. Systems. ( (a) operational, (b) relational, and (c) transformational.)
Step 3. Determine degree of alignment.
     Step 3a. Internal alignment.
     Step 3b. External alignment.
Step 4. Determine sustainability.
     Step 4a. Imitation.
     Step 4b. Durability

Business Strategy Chapter 5 Competitive Life Cycle

Growth results from scaling new products and services up the S-curve and also occurs from the continuous creation of new S-curves. So in one sense, the purpose of strategy is to create new S-curves
The CLC is split into three phases consistent with the S-curve: an emergent phase, a growth phase, and a mature phase.
Demarking each of the three phases associated with a single S-curve are transitory inflection points: disruption, annealing, and shakeout.
After a disruption occurs, the new S-curve begins and we enter the emergent phase. This period is often characterized by what others have referred to as the “era of ferment” as businesses experiment with various designs.
The emergent phase ends as customer adoption accelerates and the product concept solidifies around a core set of design features.
Annealing typically gives way to the growth phase. As uncertainty in the technology or design is reduced, more customers are willing to purchase, leading to significant growth in demand. Business focus typically shifts from development to scaling.
As the growth phase winds down, when marginal growth rates begin declining, a competitive shakeout often ensues. Marginally competitive firms exit the market and a handful of dominant players emerge. Shakeouts can vary in intensity.
After the shakeout, industries enter the mature phase. Growth is still possible, but it is likely to be less pronounced and often comes from stealing market share from competitors. When the market continues to support a number of rivals, competition can be particularly fierce with strong downward price pressure.
Total quality management and Six Sigma programs are common.