Intra-Industry Analysis Game theory Competitor Analysis Segmentation Strategic Groups OUTLINE

The Contribution of Game Theory to Competitive Analysis The Contribution of Game Theory to Competitive Analysis Main value: 1.Framing strategic decisions as interactions between competitors 2.Predicting outcomes of competitive situations involving a few players Some key concepts: 1.Competition and Cooperation—Game theory can show conditions where cooperation is more advantageous than competition {P.D.} 2.Deterrence—changing the payoffs in the game in order to deter a competitor from certain actions 3.Commitment—irrevokable deployments of resources that give creditability to threats 4.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

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.

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

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

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

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

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

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

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

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

Value Net Co-opetition, Brandenburger & Nalebuff, 1996

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

PREDICTIONS What strategy changes will the competitor initiate? How will the competitor respond to our strategic initiatives? 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? ASSUMPTIONS What assumptions does the competitor hold about the industry and itself? RESOURCES & CAPABILITIES What are the competitors’ key strengths and weaknesses? A Framework for Competitor Analysis {Sources of information}

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

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

Segmenting the European Metal Can Industry

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

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

SEGMENT Low price bicycles sold primarily through department and discount stores, mainly under the retailer’s own brand (e.g. Sears’ “Free Spirit”); 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 Medium-priced bicycles sold primarily under manufacturer’s brand name and distributed mainly through specialist bicycles stores; *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 *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. Similar to low-price bicycle segment. High-priced bicycles for enthusiasts. Children’s bicycles (and tricycles) sold primarily through toy retailers (discount toy stores, department stores, and specialist toy stores). Segmentation and Key Success Factors in the U.S. Bicycle Industry Focus vs. Broad, Branding

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.

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

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