IBM 641 (GBS) UITM

1. CHAPTER 5
Global Competitive Dynamics
LEARNING OBJECTIVES
1. Define competitive dynamics and competitor analysis
2. Understand a comprehensive model of global competitive
dynamics
3. Explain what is Attack and Counterattack
4. Understand cooperation as a strategy
5. Recognize the strategies pursued by local firms when
facing competition from multinational enterprises
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2. What are Competitive Dynamics and
Competitor analysis?
in discussing strategic decision by firms, there
are certain issues we need to understand:
1. why firm pursue certain strategies and not
the alternatives?
2. consequently, how does other respond to the
strategies being pursued?
3. what are the performance outcomes of these
actions and responses?
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3. What are Competitive Dynamics?
competitive dynamics refer to actions and
response taken by competing firms (Peng,
2006).
 In this competitive global business environment,
firms continuously seek to gain competitive
advantage over the other e.g. firms that want to
be a “first-mover” must be prepared to the
possibility of others to follow and rivals may be
able to become better than them.
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4. What are Competitor analysis?
competitor analysis gives a firm a strong
market understanding.
 It refers to the assessment of the strengths and
weaknesses of current and potential
competitors.
 Competitor analysis also refers to the ability of
firms to understand not only their rivals’
strengths and weaknesses but that of their own
capabilities.
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5. Competition leading to action and
response strategies
1. Military analogy is applied in business because the
marketplace is seen as a battlefield characterized
by aggressive competition between firms.
2. Note that the terms in business strategy like “price
war”, “attack”, and “counterattack” are common
terms used in military.
3. Unlike military which fights over territories, waters,
and air space, business firms compete over market.
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6. Competition leading to action and
response strategies
4. Global firm may compete in multimarket known as
multimarket competition.
5. Multimarket competition exists when firm is competing
with the same rival in multiple markets. for example,
both Coca-cola and Pepsi present in almost every
market in the world.
6. Firm must recognize the capability of rivals to strike
back in multiple markets and this multiple market
competition may lead to reduction of competition
intensity among rivals.
7. The reduction of competition intensity is known as
mutual forbearance – leading to tolerance and self-
control among rivals within the industry.
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7. Competitive dynamics model
 Competitive Dynamic Model is a
comprehensive model on competition from
the perspective of “action” and “response”
as strategy.
 This model is based on three perspectives
which are industry-based, resource-based,
and institutional-based perspective.
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8. Competitive dynamics model
Industry-based consideration
-Concentration and industry leader
-Product homogeneity
-Stability of demand and supply
-Order frequency and value
-Social relationships among rivals
-Entry barriers
-Market commonality with rivals
Resource-based considerations
•Valuable capabilities to attack,
deter, and retaliate
•Rarity of certain assets
•Imitability of competitive actions
•Organizational skills for actions
•Resource similarity with rivals
Competitive interaction
Attack/Counterattack/
Cooperation
Institutional-based considerations
-Domestic competition: Primarily competition/ antitrust policy
-International competition: Primarily trade/antidumping policy
-Informal norms and beliefs concerning competition and cooperation
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9. Industry-Based Perspectives
 The basis of industry-based perspective using
Porter’s Five Forces is the rivalry among existing
firms in the industry. Because competition may
eventually lead to devastating effect for the entire
industry, firms may resort to collusion to reduce
the effect of competition on firms.
 Consequently, industry-based perspective
focuses on the nature of collusion followed by the
discussion on industry characteristics that lead to
collusion and prison’s dilemma.
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10. Collusion
A. Collusion refers to collective attempts to reduce competition. As mentioned
earlier, aggressive competition among rivalry firms may lead to lose-lose
situation that jeopardize the entire industry. Collusion may take place in:
1. Tacit collusion refers to indirect initiative by firms to reduce competition. It
occurs when the firms signal their intention to other industry players to
reduce output in order to maintain pricing above competitive level. In
multiple markets mutual forbearance can be regarded as a form of tacit
collusion.
2. Explicit collusion refers to direct move by firm to reduce competition. This
occurs where industry players directly negotiate on matters pertaining
output, pricing and divide market to reduce competition. Explicit collusion
is a form of cooperation which may lead to the formation of a cartel. Cartel
is an entity consists of existing industry players who agree to fix output and
pricing to safeguard market. A cartel is also known as trust because
members have to trust each other to honour their agreement e.g. member
countries of Organization of the Petroleum Exporting Countries (OPEC) or
known as “the seven sisters”.
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11. l
Prisoners’ Dilemma
 In an attempt to reduce competition, industry
players may agree to set pricing. However,
opportunities to maximize profit through price-
cutting are luring which may entice one party to
dishonour their agreement.
 In prisoners’ dilemma, although industry players
have prior agreement to fix price, they still have
strong incentives to cheat. The ultimate effect is
both parties will suffer from weak performance.
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12. Basis for Collusion – Industry Characteristics
Collusion happens when industry players foresee
that further competition is not good for the firms
and the entire industry. Hence, they resort to
collective agreement to preserve market through
collusion. Table 5.1 on the next page shows the
eight factors that enable collusion in an industry.
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13. Factors that enable collusion in the industry
Collusion Possible
(Unlikely Competition)
Collusion Difficult
(Competition Likely)
 Few firms (high concentration)
 Existence of an industry price
leader
 Homogenous products
 Stability of demand, supply, and
technology
 High-frequency, low-value orders
 Friendly social relationships
among rival managers
 High entry barriers
 High market commonality
(mutual forbearance)
 Many firms (low concentration)
 No industry price leader
 Heterogeneous products
 Rapidly growing demand, supply
and technology
 Low-frequency, high-value orders
 Distant social relationships
among rival managers
 Low entry barriers
 Lack of market commonality (no
mutual forbearance)
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14. Resource-based Consideration
Competitive dynamic informed by resource-based perspective is based on VRIO
framework of value, rarity, imitability, and organization coupled with resource familiarity.
These entire factors leading to competitive advantage that enables firm to engage in
strategic actions and compete successfully.
1. Value – in the context of competitive dynamic, the ability to attack in multiple
markets which cause rivals become vulnerable is considered value e.g. Gillette
launched its Sensor razors in twenty-three countries simultaneously to make
the rivals feel insecure.
2. Rarity – Firm with rare assets are generating significant advantage e.g. Saudi
Arabia benefits from it geographical advantage and blessed with huge oil
reserves that enable it to enforce OPEC cartel agreement.
3. Imitability – Firms with inimitable, complex strategies, and able to move
quickly often have better financial and market performance e.g. many major
airlines in the U.S. have sought to imitate successful discount carriers such as
Southwest Airline but fail to do so.
4. Organization – Some firms are organized to withstand competition while
others may have to opt for collusion. A more centrally coordinated firms may
engage in collusion that a loosely control firm.
5. Resource Similarity – Firms with relatively similar resources are likely to
possess similar strengths and weaknesses e.g. Coca Cola and PepsiCo, which
results in similar competitive action.
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15. Institution-based consideration
governing domestic competition
Understanding the role of institution as highlighted in institution-based view
lead to the recognition that free market system is not necessarily free in that
institution may govern competitive dynamics in domestic and international
competition.
a) Formal Institutions Governing Domestic Competition
In general, formal institution that governs domestic institution refers to
competition policy. This competition policy “determines the institutional mix
of competition and cooperation that give rise to the market system.”
Commonly u sed competition policy is antitrust policy. The policy is designed
to fight against the issue of monopolies, cartel and trust and used widely in US &
other developed nations. The focal point of competition/antitrust policy focus is
pertaining to the issue of pricing which include:
i) Collusive pricing setting - it is where the collusion parties set
prices at a level higher than the competitive level.
ii) Predatory pricing – is defined by U.S. laws as (a) setting prices
below costs in the short run to destroy rivals, and (b) intending to
raise prices to cover losses in the long run after eliminating rivals.
iii) Extraterritoriality – is imposing one laws to other countries e.g.
Microsoft faced no problem with U.S. antitrust law but was alleged under
antitrust law policy in EU.
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16. Institution-based consideration
governing international competition
Formal institutions that govern international competition concern two major issues of
international antidumping and export cartels.
i) Dumping concept is similar to that of predatory pricing discussed earlier and is
defined as (i) selling below cost in foreign market, and (ii) planning to raise
prices after
eliminating local rivals.
There are four possible outcomes of antidumping investigation:
1) If foreign firm fail to provide the requested data, authorities will use
data provided by the accusing firm as evidence, that give accusing firm a
better chance to win the case.
2) If however, foreign firms do provide cost data, the accusing firm can
still accuse foreign firm of lying and that foreign firm is practising unfair
pricing.
3) In the case where the cost data are verified, U.S antidumping laws
allow the accusing firm to argue that the data are misleading.
4) The last outcome is that it is possible that foreign firm wins the case,
but this seems very unlikely.
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17. Institution-based consideration
governing international competition
b) Formal Institutions Governing International Competition
ii) Export cartels – is firms alliances or collusion that collaborate in exporting.
Their actions include setting quota and fixing prices. Although export cartels is
against competition policy, such collusion may be allowed in a domestic setting
or sometimes even encouraged if it promotes exports of that particular country.
For example, Webb-Pomerene Act of 1918 and Export Trading Company Act
of 1982 were passed by U.S. Congress that grant antitrust exemption to their
export cartels. Taking into consideration that due to competitiveness of
international market, U.S. export cartels plays relatively minor role in U.S.
exports, approximately 2 percent.
Both dumping and cartels shows how formal institutions are
giving domestic firms additional advantages at the expense of
foreign firms.
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18. Informal norms and beliefs
Informal norms and beliefs define how things should be done.
In other words, the behaviour of individuals and firms are
influenced by certain values, beliefs and norms. For example,
given some new norms such as investing in emerging
economies like China and Mexico, many Western firms often
imitate each other without a clear understanding on how to
make it work. Another example is where Asians view trust-
based relationships among individuals or firms as normal and
beneficial, whereas Americans view them as collusion.
The overall view of institution-based view suggests that
institutional condition plays critical role that may hinder or aid
firm competitiveness.
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19. ATTACKS & COUNTERATTACK
Attack refers to an initial set of actions to gain competitive advantage, and
counterattack is consequently refers to a set of actions in response to
attack.
There are three main types of attack:
i) Thrust
A firm launches direct attack to dominate a particular market with the
intention to oust its direct competitor e.g. Microsoft’s Explorer against
Netscape. In 1990, Netscape conquer 90 percent of internet browser
market, whereas Microsoft’s Explorer had less than 5 percent market share.
Realising the importance of internet browser market, Microsoft launched a
direct attack on Netscape which resulted in Netscape market share fell
tremendously to 14 percent while Microsoft gained 86 percent. How did
Microsoft managed to attack? By paying Netscape’s biggest clients Apple
and KPMG to abandon Netscape. Is that mean and unethical?
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20. ATTACKS & COUNTERATTACK
ii) Feint
Under this strategy a firm attack competitor’s important market so that the
competitor will be occupied defending that market. This is based on a
military strategy in deceiving the opponent. In fact, the attacking firm has
no intention to dominate that market. For example, in the early 1990s two
major players in U.S. cigarette market were Philip Morris and R.J.
Reynolds (RJR). Due to falling demand in U.S., both players were eyeing
for Central and Eastern Europe (CEE) market which demand for
cigarettes was growing rapidly. Philip Morris execute feint in the United
States by cutting price of its product by 20 percent. With this attack, RJR
had to defend its U.S. market and diverted its resources (initially used for
penetrating CEE market). Hence, R.J. Reynolds had to abandon CEE
market and this leave opportunity for Philip Morris to dominate CEE
market.
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21. ATTACKS & COUNTERATTACK
iii) Gambit
Is a strategy in which a firm has to surrender its low-value market in order to
capture a high-value market (similar to strategy of scarifying a pawn in a
chess game). For example, both Gillette and Bic competed in razors and
lighters market. Gillette was strong in razors and mediocre in lighters. On
the other hand, Bic had a stronger position in lighters rather than razor. In
1984, Gillette pulled out entirely from lighters and dedicated its attention and
resources to razor. Bic accepted the gambit and diverted razor resources to
focus merely on lighter. Thus, gambit can be viewed as an exchange of the
sphere of influence which resulted in both gain stronger position in only one
market.
For gambit strategy to work it must satisfy two conditions (1) rival has a
significant stake in that market, and (2) rival must perceive one party
withdrawal to be genuine and credible.
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22. Factors that lead to Counterattack
In general, there are three drivers of counterattack:
1. Awareness –
Rival is aware that one’s action is to drive away its position from the
market. If the firm being attacked is aware of the attacking firm’s
intention, most likely it will counterattack.
2. Motivation –
The firm being attacked have the motivation to counterattack. This
motivation comes from the fact that the market is significantly
important to the firm being attacked.
3. Capability –
The firm being attacked have all the resources and capability to launch
counterattack. Although the firm being attacked is aware and motivated
to counterattack, but if it does not have the capabilities and resources to
counterattack, then, counterattack will not take place.
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23. Creating Healthy Competitions Through Cooperation
Rather than competing with each other, firms within an industry may resort to
informal corporation in order to reduce competitive intensity. There are many
ways in which this informal cooperation can be achieved:
1 Nonaggression –
A nonaggression strategy is when a firm avoid from intimidating others. It
refers to nonthreatening ways of doing business so that it will not provoke
others to attack one’s core business. For example, IKEA investment in
furniture market focuses on wooden, self-assembly segment. It does not
enter the factory-assembled, upholstered
segment, indicating its intention not to raise competition and expecting
others not to enter its core segment.
2 Market entry –
Firm may enter a new market but not in a way that challenge the existing
players but to seek mutual forbearance. MNEs in known for pursuing
each other, entering one country after another. For example, UPS is
known for its strong ground delivery expanded its air express service. In
response, Federal Express built up a ground network.
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24. Creating Healthy Competitions Through Cooperation
3 Truce seeking –
Firm can send a signal for a truce, for example, by announcing a price
increase in a middle of a “price war.” By sending this signal, firm
expect others to follow as a prolong price war hurts the profits of all
rivals.
4 Communication via government –
Direct negotiation among rivals to fix pricing is illegal. Hence, firm can
send signal to rivals to reduce competition via government involvement
e.g. in 2003, Cisco sued its Chinese rival Huawei for alleged
intellectual violation. As a result, Cisco and Huawei came to
communication and Cisco resorted to drop the case after both firms
negotiated a solution.
5 Strategic alliance –
Firms can cooperate by organizing strategic alliances with competing
firms for cost reduction. As price fixing is illegal, firms must work
together to reduce cost e.g. in 1999 EU convicted the oil country cartel
in 1999 for fix pricing. The cartel breakups and all members were
granted to join one of the three international alliances. The benefit of
these alliances include cost reduction, technology sharing and market
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25. Local Firms vs Multinational Enterprises
In general, local firms lack the capabilities like expertise, experience,
and resources to compete with MNEs. However, this does not mean
that local firms should not respond to compete and/or to cooperate.
Local firms can adopt four strategic positions e.g. global,
international, transnational, multidomestic depending on:
(1) the condition of the industry, and
(2) the nature of competitive assets.
Globalization pressures local firms to respond to dynamic business
environment. It is evident that local firms are not necessarily weak
when facing giant foreign competition at their home market e.g. TLC
and Bird, are able to respond well to competition and manage to
dominate the local market and eventually becoming MNEs
themselves.
Hence, it is important for local firms to make strategic actions
through completion and/or corporation (depending on their
competitive assets) in order not only to survive in the local market
but also to work toward penetrating foreign markets.
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