Strategic Management/ Business Policy Joe Mahoney

Competitive Dynamics Competitive dynamics results from a series of competitive actions and competitive responses among firms competing within a particular industry.

Competitive Dynamics Mutual interdependence among firms means that strategic competitiveness and above-average returns result only when companies recognize that their strategies are not implemented in isolation from their competitors’ actions and responses. Eastman Kodak and Fuji Photo, for example, continue to engage in a series of competitive actions and responses in an effort to establish competitive advantage.

Competitive Dynamics Multi-point competition occurs when firms compete against each other simultaneously in several product or geographic markets. For example, the largest U.S. airlines have substantial market overlap and such overlap can reduce the likelihood of competitive rivalry in the industry.

Competitive Dynamics A first mover is a firm that takes an initial competitive action. Successful actions allow a firm to earn above-average returns until other competitors are able to respond effectively. In addition, first movers have the opportunity to gain customer loyalty. For instance, Harley-Davidson has been able to maintain a competitive lead in large motorcycles due to intense customer loyalty.

Competitive Dynamics A first mover also faces potential disadvantages: High risk High development costs High demand uncertainty

Competitive Dynamics A second mover is a firm that responds to a first mover’s competitive action often through imitation or a move designed to counter the effects of the initial action. BankOne was a fast second mover in Internet banking. New Balance is a successful second mover in the athletic shoe industry.

Competitive Dynamics Second mover advantages include: Reduction in demand uncertainty Market research to improve satisfying customer needs Learn from the first mover’s successes and shortcomings Gaining time for R&D to develop a superior product

Scenario Analysis -The Relationship Between Finance & Strategy Traditional Evaluation Of Financial Projects Net Present Value or Discounted Cash Flow Analysis time CF + -

Scenario Analysis -The Relationship Between Finance & Strategy Differences Between Strategy and Finance Finance: Payoffs are determined exogenously or by chance Strategy: Our actions affect the payoffs we are likely to experience Decision-Theoretic Vs. Game-Theoretic Analysis Games against “Nature” Vs. Games against other people

Commitment Versus Flexibility -The Value of Time Cost to Build Plant = $1600 Cost of Capital = 10% Price(t=1) = $100 Price(t=0) = $200 Price(t=1) = $300 .5 Price = $100 Price = $300

Commitment Versus Flexibility - The Value of Time

Competencies and Strategic Flexibility In previous classes we have discussed modular product and modular organizations. A critical element in the design of modular organizations is “quick connect” information systems for scheduling, monitoring, and documenting the interfacing activities across linked firms. E.g., associations of automobile assemblers, grocery distributors, and chemical producers have created industry-wide standard software for quick connecting firms at different positions in industry value chains.

Competencies and Strategic Flexibility IKEA’s computer-based coordination of its 1,800 “loosely-coupled” suppliers of modular ready-to-assemble furniture components in a 50-country global product creation and production network illustrates strategic flexibility and core competencies for repositioning product offerings. In dynamic markets, quick response capabilities often increase the value of a firm’s strategic options if the firm can devise ways to exercise options faster than competitors.

Competencies and Strategic Flexibility Thus, strategic flexibility is analogous to “having options” and commitment is analogous to the “exercise of an option.” The greater the uncertainty the firm faces, the more valuable are its strategic options. The resolution of uncertainty over time is the catalyst which induces a manager to make (sunk cost) commitments.

Types of Strategic Options Option to wait Time-to-build option staged, incremental investments Option to abandon Growth options