Chapter 12 Managing Competitive Dynamics LEARNING OBJECTIVES After

Chapter 12 Managing Competitive Dynamics

LEARNING OBJECTIVES After studying this chapter, you should be able to: 1. Understand the industry conditions conducive to cooperation and collusion 2. Outline how antitrust and antidumping laws affect domestic and international competition 3. Articulate how resources and capabilities influence competitive dynamics 4. Identify the drivers for attacks, counterattacks, and signaling 5. Discuss how local firms fight multinational enterprises (MNEs) 6. Participate in two leading debates concerning competitive dynamics 7. Draw implications for action

COMPETITIVE DYNAMICS competitive dynamics - actions and responses undertaken by competing firms competitor analysis - process of anticipating a rivals’ actions in order to revise a firm’s plan and prepare to deal with rivals’ responses

COMPETITION, COOPERATION, AND COLLUSION collusion - collective attempts between competing firms to reduce competition tacit collusion - firms indirectly coordinating actions by signaling their intention to reduce output and maintain pricing above competitive levels explicit collusion - firms directly negotiating output and pricing and dividing markets cartel - entity that engages in output- and price-fixing involving multiple competitors

COMPETITION, COOPERATION, AND COLLUSION antitrust laws - laws attempting to curtail anticompetitive business practices prisoners’ dilemma - in game theory, a type of game in which the outcome depends on two parties deciding whether to cooperate or to defect game theory - branch of mathematics that studies the interactions between two competing parties

Cooperation and Collusion concentration ratio - percentage of total industry sales accounted for by the top four, eight, or twenty firms price leader - firm that has a dominant market share and sets “acceptable” prices and margins in the industry capacity to punish - firm that has sufficient resources to deter and combat defection

Cooperation and Collusion market commonality - overlap between two rivals’ markets multimarket competition - firms engage the same rivals in multiple markets mutual forbearance - act of strategic deterrence in which multimarket firms respect their rivals’ spheres of influence in certain markets, and their rivals reciprocate, leading to tacit collusion cross-market retaliation - ability of a firm to expand in a competitor’s market if the competitor attacks in its original market

Formal Institutions Governing Domestic Competition: A Focus on Antitrust competition policy - way in which a company determines the institutional mix of competition and cooperation, which gives rise to the market system antitrust policy - laws designed to combat monopolies and cartels

Formal Institutions Governing Domestic Competition: A Focus on Antitrust collusive price setting - price setting by monopolists or collusion parties at a higher than competitive level predatory pricing - attempt to monopolize a market by setting prices below cost and intending to raise prices to cover losses in the long run after eliminating rivals dumping - attempt by an exporter to monopolize a market by selling below cost abroad, and then raising prices to eliminate a competitor

RESOURCE SIMILARITY resource similarity - extent to which a given competitor possesses strategic endowment comparable, in terms of both type and amount, to those of the focal firm

VRIO FRAMEWORK (V) value - firm resources must create value when (R) rarity - either by nature or nurture (or both), certain (I) imitability - how to imitate successful rivals organizational - firms need to be organized for (O) engaging rivals assets are very rare, thus generating significant advantage competitive actions, such as stealth attacks and willingness to answer challenges “tit-for-tat”

MAIN TYPES OF ATTACK thrust - classic frontal attack with brute forces feint - firm’s attack on a focal arena important to a competitor but not the attacker’s true target area gambit - withdraw from a low-value market to attract rivals to divert resources into it and then to capture a high-value market

ATTACK AND COUNTERATTACK awareness - prerequisite for counterattack motivation - if the attacked market is of marginal value, managers may decide not to counterattack capabilities - strong capabilities needed to carry out counterattacks

COOPERATION AND SIGNALING Short of illegally talking directly to rivals, firms have to resort to signaling by: nonaggression strategy - active investment in nonthreatening ways so as not to provoke attacks on a firm’s core markets market entry strategy - seeks mutual forbearance by establishing multimarket contact truce - firms can send an open signal for a truce

COOPERATION AND SIGNALING Short of illegally talking directly to rivals, firms have to resort to signaling by: enlisting the help of government - filing an antidumping petition or suing strategic alliances with rivals – in the US, reducing cost by 10% through an alliance is legal

LOCAL FIRMS vs. MNEs defender strategy - leveraging local assets in areas in which MNEs are weak extender strategy - centered on leveraging homegrown competencies abroad dodger strategy - centered on cooperating through joint ventures (JVs) with MNEs and sell-offs to MNEs contender strategy - centered on a firm engaging in rapid learning and then expanding overseas

COMPETITION VS. ANTIDUMPING Because dumping centers on selling below cost, it is often difficult (if not impossible) to prove the case, given the ambiguity concerning cost. The second argument is that if foreign firms are indeed selling below cost, so what? This is simply a commonly used competitive action.

MANAGERS vs. ANTITRUST POLICYMAKERS Most business school students do not know antitrust policy, and when they graduate to become managers, they do not care either. Individuals trained in economics and law who have relatively little sense of how real companies make decisions end up making and enforcing the rules governing competition. Such a disconnect naturally breeds mutual suspicion and frustration from both sides.