1. Strategic Management/ Business Policy
Joe Mahoney

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

3. 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.

4. 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.

5. 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.

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

7. 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.

8. 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

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

10. 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

12. 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

13. Commitment Versus Flexibility - The Value of Time

14. 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.

15. 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.

16. 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.

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