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Market Structure: Why market fundamentals matter for strategists

Market Structure: Why market fundamentals matter for strategists. Paul C. Godfrey Mark H. Hansen Marriott School of Management. Perfectly competitive markets. Perfect competition: Assumptions. All assets completely “fungible” or tradable Anyone can make every product

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Market Structure: Why market fundamentals matter for strategists

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  1. Market Structure:Why market fundamentals matter for strategists Paul C. Godfrey Mark H. Hansen Marriott School of Management

  2. Perfectly competitive markets

  3. Perfect competition: Assumptions • All assets completely “fungible” or tradable • Anyone can make every product • Costless entry or exit • Anyone can make every product • No transaction costs • Full information • Transparent traders • Static industries • Widgets don’t change

  4. Perfect competition: Private results • Market clears • No excess demand • No economic profit • All sellers have same cost curve • All sellers face a perfectly elastic demand curve • Entry/ exit stabilize price • Industry supply schedule is flat • Productive efficiency • All production most cost efficient MC AC $ P Industry supply curve/Firm demand curve Quantity

  5. Apples and asset fungibility: An apples to apples comparison

  6. Ricardian markets: when apples differ • David Ricardo (1772-1823) • Considers corn (grain) production in the British economy • All assumptions the same as perfect competition except • Plots of land are of various quality for producing corn • Variations in quality inhere in the land (non-tradable or fungible) • Differential quality is a fixed attribute • Each plot of land requires the same amount of labor to work (marginal costs are equal)

  7. Economic rent = the difference between the market return of a piece of land and the return of the marginal plot in production Farms (firms) earn rents on unique, valuable, and rare assets. The most valuable farm (firm) will have the lowest average cost per unit of corn A Ricardian corn market Corn output/ $ Rent Oc Units in production Marginal plot of land Oc—the opportunity cost of putting the land to the plow

  8. Strategy in a Ricardian market:Own the best land • Firms that can capture, create resources can earn rents • Resources can be endowed, as in nature • Resources can be developed through investment

  9. Industry life cycles Red Delicious, 1880 Braeburn, 1956

  10. Life cycle basics • Like products, and individuals, industries go through definitive phases of development • Stage of development predicts • Demand • Level of Competition • Type and nature of innovation • Entry, exit, and competitive interactions (e.g., alliances, mergers) • Strategies that succeed at one stage may be deadly at another

  11. The Industry Life Cycle Sales Volume Fragmentation Shakeout Maturity Uncertainty Renewal Stagnation Decline Time

  12. Competition and the Life Cycle

  13. Managing the industry life cycle:Act age appropriate • Be sensitive to changes in overall demand, the best predictor of life cycle shift • Have the courage to do what needs to be done • Shoot the founder (fragmentation to shakeout) • Cull the product line (maturity to decline/ renewal) • Decline may be a very profitable strategy • Exploit economies of scale/ scope • Unattractive for competitive entry

  14. Profit pools:Where in the value chain to locate

  15. Profit pools: Looking at the value chain • It’s not just how you compete, but where • The Value Chain distributes value unevenly • The Personal Computer Industry

  16. Early 1980’s Late 1980’s Mid 1990’s

  17. Managing profit pools:Be in the right pools • Profit pools exploits existing customers by offering them new products/ services • Firms can leverage existing assets and production expertise • Some pools may be inaccessible due to resource mismatches • Be careful about losing focus • Dilute brand or other reputation-based capital • Divert management attention from core business

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