Dynamic Strategy - Market context and competitive games
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mgmt_685_session_51.pptxCorporate Strategy in a Global Economy Session 5 Market Context and Competitive Games
Agenda
Introduction
Choice (Agency) and Competitive Business Strategies: SWOT analysis
Compliance (Market Structures) and Competitive Business Strategies
Market Structures based on Niche Density
Market Structures based on Industry lifecycle
Market Structures and Strategies for Competitive Moves
Market Structures and Strategies for Responding to Competitive Moves
Chance and Competitive Business Strategies
Case: Structure of the wine industry
Case: Global Wine Wars: New World vs. Old
Video case: The Grape Wall of China
Video case: Judy Leissner, CEO of Grace Vineyard, on company strategy
Introduction
Compliance
Choice
Chance
Competitive business strategies
Choice and Competitive Business Strategies
The choice school calls for identifying the best alignment between the internal content and the external context of a firm.
The first step in this process is identify the Key Success Factors – the factors in a firm’s market environment that influence a firm’s ability to survive and grow, and evaluate if the firm’s capabilities give it a position of strength or of weakness on those factors
Grant (2013) offers a simple approach to identify the Key Success Factors (KSFs). To survive and grow in an industry, a firm needs to meet two criteria:
Serve the customers
Survive the competition
Choice and Competitive Business Strategies – SWOT Analysis
Identifying Strengths and Weaknesses using Key Strategic Factors Approach
Strength?
Weakness?
How to win the customer preference in a market?
What is critical to survive the competition in a market?
Key Success Factors
Choice and Competitive Business Strategies: SWOT analysis
Frameworks for identifying opportunities and threats or challenges:
Five Forces and Value Net
STEP
STEEP
Opportunities
Threats/ Challenges
STEEP analysis
Socio-cultural
Technological
Ecological
Economic
Political
Compliance (Market Structures) and Competitive Business Strategies
The competitive behavior of the firm is largely determined by the structural characteristics of the market in which they operate. Market structures influence competitive business strategies in two ways:
Market structure
Competitive strengths and weaknesses
Competitive moves
Competitive countermoves
Competitiver behavior
Compliance (Market Structures) and Competitive Business Strategies
There are two typologies of market structures – one based on the niche density (i.e. the number of competitors), and the other based on carrying capacity (i.e. the industry lifecycle)
Typology of market structures
Based on niche density
Monopoly
Oligopoly
Based on carrying capacity
Nascent market
Niche markets
Perfect competi-tion
Hyper-competition
Dominant firm
Fragmented market
Market Structures based on Niche Density, and Strategic Behaviors: Monopoly
Monopoly refers to a market structure with only one firm. The monopoly firm is largely free to decide its own price, output, and other product and service features
Monopolists are known to engage in a range of tactics, or games, to impede the entry and success of other entrants: “predatory pricing”, “essential facility denial”, “vaporware”
In the Internet era, new types of monopolies – referred to as creative monopolies – have emerged, who are actually helping to cut the monopoly power of suppliers, and transfer value back to the consumers (for example, Amazon)
Market Structures based on Niche Density, and Strategic Behaviors: Oligopoly
Oligopoly comprises of a few large firms that perceive one another as mutually inter-dependent. There exists an intense rivalry along several dimensions, such as price, quality, brand image, and market share. Success requires firms to consider the effects of their actions on the competitors’ behavior
It is best for a firm to strike a balance between industry level cooperation (to avoid profit eroding warfare) and firm level competition (to avoid giving up potential revenues and profits)
New evidence suggests that most oligopolistic markets tend to become ineffective because of collusive tendencies, and ripe for creative destruction by new firms
Market Structures based on Niche Density, and Strategic Behaviors: Niche Markets
Niche markets consist of market segments within the larger marketplace that emphasize a particular need, or geographic, demographic or product segment but that differ along some key dimensions from other market segments in the marketplace
Firms have two options for value differentiation in niche markets:
Market Structures based on Niche Density, and Strategic Behaviors: Perfect Competition
Perfect competition is characterized by the lack of significant fixed costs or investments, and running business largely on variable costs. The firms tightly monitor their variable costs, and compete on efficiency
Though basic economic theory considers perfect competition to be the ideal state for social welfare, it does not provide effective conditions for the growth of the firms or the industry. It often invites fly-by-night players to make a fast, extra buck by free riding on the public goods and social infrastructure.
A key insight is when the access to infrastructure, technology and knowledge is based on the pay per use model, more firms are likely to enter the market with limited risks of huge losses if they fail. Such pay per use model thus can engender several creative endeavors and promote innovation and growth.
Market Structures based on Industry lifecycle, and Strategic Behaviors: Nascent Competition Market
Nascent competition markets are usually spurred by technological innovation, newly emerging customer needs, and economic and sociological shifts. A distinguishing characteristic of the nascent competition market is the lack of any “rules of the game”, and a competitive race among the firms
The success requires winning the competitive race on several fronts: improving the functionality of the technology, forging advantageous relationships with channel partners, acquiring a core group of loyal customers, accessing patient venture capitalists and entrepreneurial human capital, and moving fast to develop a network of players who commit to the use of firm’s technology as the reliable, cost-effective and dominant one
Market Structures based on Industry lifecycle, and Strategic Behaviors: Hyper-competitive Market
Hyper-competitive market is turbulent and fast changing where the rules of game are continually shifting, spurred by the processes of globalization and information economy
The firms therefore seek to distribute up-front investment requirements, either across a network of firms or over time
A firm competing on the edge of hyper-competition thrives on the “guerilla advantage”
Market Structures based on Industry lifecycle, and Strategic Behaviors: Dominant Firm
Dominant firm structure comprises of a single large firm at the core, and several smaller firms at the periphery of the market
The dominant firm generally enjoys a competitive advantage based on the lower costs deriving from early entry and “learning-by-doing”, large economies of scale, and proprietary technology; the smaller firms focus on niches that are not profitable or attractive for the dominant firm, due to factors such as smaller scale, idiosyncratic resources and knowledge bases, and customized services of the smaller firms in their target markets
A special form of the dominant firm is the vertical dominance, where a dominant firm forms captive vertical relationships with vendors and distributors
Market Structures based on Industry lifecycle, and Strategic Behaviors: Fragmented
Fragmented structure is one where no firm has a significant market share to strongly influence market outcomes
While the products tend to be expensive and not very well developed, the success depends on keeping the costs low using a “bare bones” approach with low overheads, minimum wage employees, and tight cost control
A fragmented structure often arises when the government breaks-up a monopoly, or deregulates entry into an erstwhile monopoly market
Approaches for consolidating a fragmented market:
Mergers & Acquisitions
Codification and Franchising
Verticalization
Market Structures and Strategies for Competitive Moves
Major Defensive Moves
Cover all bases, fortify and signal commitment
Establish Footholds
Major Offensive Moves
Flanking Strategy
Guerilla Strategy
Prepare for Disrupting self
Judo Strategy
Market Structures and Strategies for Responding to Competitive Moves
Research indicates that a firm’s response to competitive moves of rivals is a function of three factors - awareness, motivation, and capability
In general, competitive games tend to be rule-based, in which specific “rules of engagement” based on the market structure influence the awareness, motivation and capability of the firms (Brandenburger & Nalebuff, 1995). There are three major rules of engagement:
Timeframe
- the timeframe for and speed with which the rivals respond to one another’s moves
Fair play
Expected payoffs
- an equal opportunity for all firms to participate successfully in the competitive game
- how the firms expect to win or lose from a competitive move or countermove
Chance and Competitive Business Strategies
Unpredictable and unexpected events, or chance, also play a big role in shaping competitive business strategies
The chance factor influences the context of competitive business strategies in two ways: the scope of dynamism, and the scale of disruption
Globalization is associated with both increasing complexity (chance factors influencing more variables concurrently) and increasing radicality or uncertainty (more frequent, rapid, and unexpected surprises). This requires that the strategies must be adaptable to the crisis events
Chance and Competitive Business Strategies
Scenario analysis is a useful tool for discovering fundamental forces that shape future chance events, and to prepare the firm for potentially complex and uncertain chance events
Process of Scenario Analysis:
Business concept
New more robust understanding of the system
Key Variables
Scenario
end-states
Prototype scenarios
Research questions
Systems analysis
Systemic understanding
Case: Structure of the wine industry
The actors of the wine chain:
These actors form cluster groupings, generally structured according to employment basins, involving companies in the same sector
Grape growers
Producers of grapes
Cooperatives
Enterprises created by farmers in order to ensure a shared use of production materials, packaging, bottling, warehousing and marketing
Wine brokers
In France they operate in the upstream part of the wine chain, on behalf of wholesalers
Wine merchants
Firms must acknowledge this status and its legal constraints to be authorized to buy and sell wine
Case: Global Wine Wars: New World vs. Old
Old World wine producers found themselves constrained by embedded wine-making traditions, restrictive industry regulations, and complex national and European Community legislation. This provided an opportunity for New World wine companies to challenge the more established Old World producers by introducing innovations at every stage of the value chain
Top 20 Wine Brands 2004-2008
Case: Global Wine Wars: New World vs. Old
Some benefits of the New World wine producers:
Less expensive land
Willingness to experiment unconstrained by tradition
Innovations in growing, winemaking, packaging and marketing
Control of the full value chain
Ability to rapidly react to shifts in demand
Case: Global Wine Wars: New World vs. Old
Wine Industry Value Chain:
Video case: The Grape Wall of China
Chinese wine industry is on the rise. In order for it to get to compete on a global basis, the following challenges should be addressed:
Competition with increasing number of foreign wines (due to WTO entry)
Lack of wine industry standards and regulations
Lack of Chinese wine drinking culture
Relative homogeneity of Chinese wine
Video case: Judy Leissner, CEO of Grace Vineyard, on company strategy
According to an interview with Judy Leissner, CEO of Grace Vineyard in China, some aspects of the company’s strategy that led the company to success are the following:
Focus on domestic market where population is getting wealthier and more health-conscious
Focus on quality wine for upper middle class
Establishment of wine shops to perform wine education for consumers
