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Lecture Managerial economics - Chapter 6 include the contents: How competition is rivalry to obtain a distinct advantage, categorizing and analyzing competitive strategies, how mergers and lawful agreements among competitors can sometimes increase economic value created in a market,... Inviting you to refer.
Week COMPETITION & STRATEGY INTRODUCTION • How competition is rivalry to obtain a distinct advantage • Categorizing and analyzing competitive strategies • How mergers and lawful agreements among competitors can sometimes increase economic value created in a market • How restrictive vertical agreements between manufacturers and dealers or parent companies and franchisees can increase competition and benefit consumers • Strategies for protecting profits • costs and benefits of attempting to compete by influencing public opinion or government policy • How a business can identify tangible and intangible competitive resources and formulate strategies that make the best use of them Competition: Exceptional – Competitive Ideas • Competition starts with ideas • Asked how he had produced so many good ideas over his career, Nobel Prize–winning chemist LinusPauling responded that “the best way to have a good idea is to have lots of ideas.” Even the most original ideas build on a foundation of other ideas • A competitive idea is not necessarily a scientific one • It may be as simple as opening a business in an underserved location, keeping it open all night, or outrightly imitating the success of a competitor Competition: The Paradox: Competing to Acquire Market Power • Businesses compete to distinguish themselves in the eyes of customers, and by becoming distinctive they acquire some market power • A business implements a risky competitive idea in order to reap high returns • The possibility of high returns induces risk-taking • But entry will erode profits • In actual markets, businesses often compete by discounting prices rather than taking the equilibrium price as given and unalterable • Business try to bind customers to themselves using techniques like frequent-flier miles or other loyalty programs • In real markets advertising is valuable to offer information Competition: The Risks of Competition • Competition is risky, particularly for small startups • Only about 40 percent of startups show accounting profits over their lifetimes, which may not cover their opportunity costs • Thirty percent break even and 30 percent are losers Competition and Deception • Competitive conditions constrain the freedom of all producers, whether they face many competitors or few • In this chapter we continue to assume that buyers and sellers act rationally on information that is available to them • In particular we rule out strategies that only succeed if one side can deceive the other (the sale of lossleaders e.g) Selection Bias, Again • People recall successes more easily than failures • They give more weight to more recent events • Our recall is biased and we often must use data that are not random samples of an underlying population • Now to the success of Big-C What’s Big-C’s Secret? • Here is a partial list of explanations that have been offered for Big-C’s success: • decentralized decision-making, • centralized decision-making, • decision-making between the center and the stores, • regional relationships, • relationships with employees • using economics to determine strategy Pitfalls in Studying Competition –Self-Serving Recommendations • The structure of corporate business further complicates the analysis of strategy • A corporation’s executives and board of directors might make choices that are in their personal interests rather than those of their shareholders, who would prefer decisions that maximize the values of their stock • As will be seen later, managers whose firms produce substantial free cash flows may prefer to spend them on questionable acquisitions that often fail to benefit shareholders • This tactic increases the size of the firm which usually means higher pay and prestige Creating Economic Value • Both seller and buyer benefit from a transaction if the seller earns more than his opportunity cost and the buyer pays a price below maximum willingness to pay • Economic value is the difference between cost and valuation 10 MERGERS & AGREEMENTS 12 Horizontal Mergers and Agreements -Mergers • Mergers and acquisitions can be important elements of strategy • A horizontal merger puts the assets of two firms that operate in the same market under the same ownership • The consequences depend on market structure and on how the merger affects costs • U.S antitrust law says that a “naked” agreement whose only goal is to fix prices is per se illegal—its very existence is unlawful 13 Vertical Mergers and Agreements • An industry’s output is often produced in stages • For example, oil is first extracted from the ground, then refined, and finally the refined products are retailed • A firm is vertically integrated if it subsumes multiple stages • Integration can produce savings if it improves coordination among the stages • But it also might raise costs if there are difficulties in managing dissimilar activities 14 Vertical Mergers and Agreements (cont.) • The degree of integration matters because costs and revenues can vary with the number of stages in which a firm operates • Costs may increase if there are problems managing dissimilar operations • Vertical mergers are hardly ever strongly scrutinized by anti-trust regulators • A firm will merge vertically to improve its competitiveness 15 Vertical Mergers and Agreements _ Restrictive Agreements • Many vertical agreements greatly restrict the future choices of both parties • A franchise contract between a carmaker and a dealer often prohibits the manufacturer from opening another outlet close by, that is, it specifies an exclusive territory • Fast-food franchises often require the owner of an outlet to buy all its food through the parent organization, and the parent organization promises to always have food on hand to fulfill its side of the requirements contract 16 Vertical Mergers and Agreements _ Restrictive Agreements (cont.) • Manufacturers and retailers may have exclusive dealing contracts • All these contracts contain vertical restrictions that limit the parties choices • Often a parent will franchise outlets and hire employees to run others • McDonald’s only owns 15% of its stores • Starbucks Coffee has no individual franchises 17 Sustaining & Extending Competitive Advantage 18 Barriers to Entry-Size and Commitment • Building barriers to entry that protect profits against existing and future competitors can be an important element of strategy • Size and specificity may serve as barriers to entry • A firm may need to be sufficiently large to achieve available economies of scale • Firms may also need to invest in specific assets that are not easily redeployed to other uses and locations A power plant for instance 19 Intangible Assets: Trademarks & Advertising • A seller wants to inform customers about more than price—consistent quality, for instance, may engender customer loyalty • A producer can use a brand name or trademark to assure buyers it will produce the quality they expect • Signalling 20 Influencing the Public and Government –Public Relations • Public recognition and approval of a firm’s practices can also be a competitive tool • Government can also help a business to advantage itself or disadvantage competitors • Among possible strategies, a firm might seek legislation that makes competition illegal, as cable TV operators have done in many cities Cable, however, has failed to suppress satellite TV, which is beyond local control • Government can also make competition costly for foreigners by imposing quotas or tariffs in return for support from the domestic industry 21 Choosing a competitive strategy • How businesses choose a competitive strategy? • Strategy is resource-based and market-based • Firms in the same market will have different resources leading to different choices • Strategy is about more than price • It can range from product design, to mergers, to political activity 22 Resources and Strategies –Innovation Pro and Con • Strategy need not entail innovation or entry into new markets—some firms have resources better suited to perfecting an established product • Properly carried out, imitation can be as profitable as innovation and sometimes less risky • Ampex invented the VCR and Xerox invented the first office computer, but neither firm found commercial success in those areas • Success is surprisingly short-lived 23 Competence and Sustainability - Identification of Resources and Feasible Strategies • A firm’s strategy choice starts by identifying its resources and the resources of its competitors, paying attention to those resources competitors have that it does not itself, and vice versa • Discussions of strategy must go beyond simple models that treat constraints as unalterable by the decision makers • The best choice depends on our resources and those of our competitors • We will often wish to use or acquire resources that make our strategy more resistant to their attacks 24 Competence and Sustainability -The Search for Strategies • The idea remains that no strategy that competitors can easily duplicate will produce long-term profit • The search for strategy must be a continuing one • Having a grand strategy may not be the road to success • Tactical moves are responses to idiosyncratic, short-lived developments • If your competitors are flexible and unpredictable you might better by deemphasizing global strategy and seeking to seize more immediate opportunities • Emphasize tactics rather than a strategic mission 25 Competence and Sustainability -The Search for Strategies (cont.) • If competition is resource based, we will require a better understanding of the types, potential, and limitations of these and other intangible resources • To so, we must proceed beyond transactions in markets • Contracts with enforceable commitments 26 ... the domestic industry 21 Choosing a competitive strategy • How businesses choose a competitive strategy? • Strategy is resource-based and market-based • Firms in the same market will have different... explanations that have been offered for Big-C’s success: • decentralized decision-making, • centralized decision-making, • decision-making between the center and the stores, • regional relationships,... employees • using economics to determine strategy Pitfalls in Studying Competition –Self-Serving Recommendations • The structure of corporate business further complicates the analysis of strategy •