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Competitive Strategy

Competitive Strategy. Glen Whitman Dept. of Economics CSUN. The Industry Perspective. Industry means all firms producing a product, plus their customers and suppliers. The definition depends on the meaning of “product,” which is not always obvious.

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Competitive Strategy

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  1. Competitive Strategy Glen Whitman Dept. of Economics CSUN

  2. The Industry Perspective • Industry means all firms producing a product, plus their customers and suppliers. • The definition depends on the meaning of “product,” which is not always obvious. • Industry perspective is a means of categorizing the various forces relevant to a firm’s choice of strategy.

  3. Porter’s Five Forces • Bargaining Power of Customers • Bargaining Power of Suppliers • Rivalry Among Existing Firms • Threat of New Entrants • Threat of Substitute Products

  4. The Porter Cross Potential Entrants Industry Competitors (Existing Firms) Suppliers Buyers Substitutes

  5. Competitive Relationships Potential Entrants Industry Competitors (Existing Firms) Suppliers Buyers Substitutes

  6. Products and Substitutes • A product can be defined broadly or narrowly. • Any product competes against substitute products (possibly produced by the same firm). • The main question: how close are the substitutes? • Homogeneous products: definitely same industry • Heterogeneous products: “closeness” is largely a matter of consumer preferences and perceptions

  7. Competition with Existing Firms • Existence of viable alternative products places a constraint on the price your firm can charge. • How similar are the competitors’ products to yours? • The more similar they are, the greater the threat to both you and them. • How much cheaper are the competitors’ products? • The better the price-performance combination, the more binding is the constraint on your price.

  8. The Threat of Entry • Just because you can’t see competitors doesn’t mean they’re not there! • Threat of future entry can affect present choices. • Barriers to entry reduce the threat: • economies of scale • customer loyalty, brand identification • proprietary technology • You can sometimes influence barriers to entry.

  9. Buyer/Seller Relationships Potential Entrants Industry Competitors (Existing Firms) Suppliers Buyers Substitutes

  10. Bargaining Power in Buyer/Seller Relationships • Bargaining Power : the ability of a buyer (seller) to negotiate a lower (higher) price • Depends primarily on substitution or “escape” opportunities, or the lack thereof • Customers/buyers can buy from someone else, do it themselves, or do without • Sellers/suppliers can sell to someone else, sell something else, or integrate downward

  11. How Competition AffectsBargaining Power • Competition on your own side of the market tends to reduce your bargaining power. • Competition on the other side of the market tends to increase your bargaining power. • Competition can be actual or potential.

  12. Other Factors That Affect Bargaining Power • Switching costs: how difficult is it to find a new supplier or a new buyer? • Substitutability: could you do without? • Make-or-buy: could you integrate upward or downward in the supply chain? • Fixed costs: do you have inputs/resources committed to your current industry or strategy? • Legal restrictions: are some strategies forbidden?

  13. Strategy as defined by management scholars: seeing the “big picture”; having an integrated plan of action Strategy as defined by economists: choosing your plans with a full awareness of interdependence Your best choice of plan depends on what others are doing; others’ best choice of plan depend on what you’re doing. You can affect others’ behavior through your own choice of plans. Thinking Strategically

  14. The Prisoners’ Dilemma Prisoner #2 Mum Fink - 1-1 - 150 Mum Prisoner #1 Fink 0-15 - 10-10

  15. The Prisoners’ Dilemma:Price-Setting Application Firm #2 High Price Low Price 18001800 15002000 High Price Firm #1 20001500 16001600 Low Price

  16. The Game of Chicken Spike Swerve Continue - 5000-5000 1000-1000 Continue Biff -10001000 00 Swerve

  17. The Game of Chicken:Bargaining Application Seller Hard Bargain Easy Bargain Hard Bargain 00 400100 Buyer Easy Bargain 100400 250250

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