Competitive Dynamics & Strategic Flexibility in Business

1. Strategic Management/Business Policy Power Point Set #6 EMBA 544

2. Competitive Dynamics • Competitive dynamicsresults from a series of competitive actions and competitive responses among firms competing within a particular industry.

3. Competitive Dynamics • Mutual interdependence among firms means that strategic competitiveness and above-average returns result only when companies recognize that their strategies are not implemented in isolation from their competitors’ actions and responses. • Eastman Kodak and Fuji Photo, for example, continue to engage in a series of competitive actions and responses in an effort to establish competitive advantage.

4. Competitive Dynamics • Multi-point competition occurs when firms compete against each other simultaneously in several product or geographic markets. • For example, the largest U.S. airlines have substantial market overlap and such overlap can reduce the likelihood of competitive rivalry in the industry.

5. Competitive Dynamics • A first mover is a firm that takes an initial competitive action. • Successful actions allow a firm to earn above-average returns until other competitors are able to respond effectively. In addition, first movers have the opportunity to gain customer loyalty. For instance, Harley-Davidson has been able to maintain a competitive lead in large motorcycles due to intense customer loyalty.

6. Competitive Dynamics • A first mover also faces potential disadvantages: • High risk • High development costs • High demand uncertainty

7. Competitive Dynamics • A second mover is a firm that responds to a first mover’s competitive action often through imitation or a move designed to counter the effects of the initial action. • BankOne was a fast second mover in Internet banking. • New Balance is a successful second mover in the athletic shoe industry.

8. Competitive Dynamics • Second mover advantages include: • Reduction in demand uncertainty • Market research to improve satisfying customer needs • Learn from the first mover’s successes and shortcomings • Gaining time for R&D to develop a superior product

9. CF + time - Scenario Analysis -The Relationship Between Finance & Strategy • Traditional Evaluation Of Financial Projects • Net Present Value or Discounted Cash Flow Analysis

11. Scenario Analysis -The Relationship Between Finance & Strategy • Differences Between Strategy and Finance • Finance: Payoffs are determined exogenously or by chance • Strategy: Our actions affect the payoffs we are likely to experience • Decision-Theoretic Vs. Game-Theoretic Analysis • Games against “Nature” Vs. Games against other people

13. Price = $300 Price(t=1) = $300 .5 Price(t=0) = $200 .5 Price = $100 Price(t=1) = $100 Commitment Versus Flexibility -The Value of Time • Cost to Build Plant = $1600 • Cost of Capital = 10%

14. Commitment Versus Flexibility -The Value of Time

15. Competencies and Strategic Flexibility • IKEA’s computer-based coordination of its 1,800 “loosely-coupled” suppliers of modular ready-to-assemble furniture components in a 50-country global product creation and production network illustrates strategic flexibility and core competencies for repositioning product offerings. • In dynamic markets, quick response capabilities often increase the value of a firm’s strategic options if the firm can devise ways to exercise options faster than competitors.

16. Competencies and Strategic Flexibility • Thus, strategic flexibility is analogous to “having options” and commitment is analogous to the “exercise of an option.” • The greater the uncertainty the firm faces, the more valuable are its strategic options. • The resolution of uncertainty over time is the catalyst which induces a manager to make (sunk cost) commitments.

17. Types of Strategic Options • Option to wait • Time-to-build option • staged, incremental investments • Option to abandon • Growth options