Lecture Managerial economics - Chapter 6: Competition and strategy

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Lecture Managerial economics - Chapter 6 include the contents: How competition is rivalry to obtain a distinct advantage, categorizing and analyzing competitive strategies, how mergers and lawful agreements among competitors can sometimes increase economic value created in a market,... Inviting you to refer.

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Nội dung Text: Lecture Managerial economics - Chapter 6: Competition and strategy

Week 6 COMPETITION & STRATEGY 1
INTRODUCTION • How competition is rivalry to obtain a distinct advantage • Categorizing and analyzing competitive strategies • How mergers and lawful agreements among competitors can sometimes increase economic value created in a market • How restrictive vertical agreements between manufacturers and dealers or parent companies and franchisees can increase competition and benefit consumers • Strategies for protecting profits • costs and benefits of attempting to compete by influencing public opinion or government policy • How a business can identify tangible and intangible competitive resources and formulate strategies that make the best use of them. 2
Competition: Exceptional – Competitive Ideas • Competition starts with ideas. • Asked how he had produced so many good ideas over his career, Nobel Prize–winning chemist LinusPauling responded that “the best way to have a good idea is to have lots of ideas.” Even the most original ideas build on a foundation of other ideas. • A competitive idea is not necessarily a scientific one • It may be as simple as opening a business in an underserved location, keeping it open all night, or outrightly imitating the success of a competitor. 3
Competition: The Paradox: Competing to Acquire Market Power • Businesses compete to distinguish themselves in the eyes of customers, and by becoming distinctive they acquire some market power. • A business implements a risky competitive idea in order to reap high returns. • The possibility of high returns induces risk-taking. • But entry will erode profits • In actual markets, businesses often compete by discounting prices rather than taking the equilibrium price as given and unalterable. • Business try to bind customers to themselves using techniques like frequent-flier miles or other loyalty programs. • In real markets advertising is valuable to offer information 4
Competition: The Risks of Competition • Competition is risky, particularly for small startups. • Only about 40 percent of startups show accounting profits over their lifetimes, which may not cover their opportunity costs. • Thirty percent break even and 30 percent are losers. 5
Competition and Deception • Competitive conditions constrain the freedom of all producers, whether they face many competitors or few. • In this chapter we continue to assume that buyers and sellers act rationally on information that is available to them. • In particular we rule out strategies that only succeed if one side can deceive the other (the sale of loss- leaders e.g). 6
Selection Bias, Again • People recall successes more easily than failures. • They give more weight to more recent events. • Our recall is biased and we often must use data that are not random samples of an underlying population. • Now to the success of Big-C 7
What’s Big-C’s Secret? • Here is a partial list of explanations that have been offered for Big-C’s success: • decentralized decision-making, • centralized decision-making, • decision-making between the center and the stores, • regional relationships, • relationships with employees • using economics to determine strategy. 8
Pitfalls in Studying Competition –Self-Serving Recommendations • The structure of corporate business further complicates the analysis of strategy. • A corporation’s executives and board of directors might make choices that are in their personal interests rather than those of their shareholders, who would prefer decisions that maximize the values of their stock. • As will be seen later, managers whose firms produce substantial free cash flows may prefer to spend them on questionable acquisitions that often fail to benefit shareholders. • This tactic increases the size of the firm which usually means higher pay and prestige. 9
Creating Economic Value • Both seller and buyer benefit from a transaction if the seller earns more than his opportunity cost and the buyer pays a price below maximum willingness to pay. • Economic value is the difference between cost and valuation. 10
Many Buyers and Many Sellers Four points emerge from this model: 1. as the innovation spreads among producers the earlier adopters will see longer-lived streams of profit before the market reaches its new long-run equilibrium. 2. the number of firms that survive after the innovation depends on the direction in which the innovation shifts the minimum point of average costs. 3. as the percentage of sellers that use the innovation increases, those who are slower to innovate will take losses if they cannot shut down temporarily or leave the market quickly. 4. any newcomer to the market will only survive if it uses the innovation. 11
MERGERS & AGREEMENTS 12
Horizontal Mergers and Agreements -Mergers • Mergers and acquisitions can be important elements of strategy. • A horizontal merger puts the assets of two firms that operate in the same market under the same ownership. • The consequences depend on market structure and on how the merger affects costs. • U.S. antitrust law says that a “naked” agreement whose only goal is to fix prices is per se illegal—its very existence is unlawful. 13
Vertical Mergers and Agreements • An industry’s output is often produced in stages. • For example, oil is first extracted from the ground, then refined, and finally the refined products are retailed. • A firm is vertically integrated if it subsumes multiple stages. • Integration can produce savings if it improves coordination among the stages. • But it also might raise costs if there are difficulties in managing dissimilar activities. 14
Vertical Mergers and Agreements (cont.) • The degree of integration matters because costs and revenues can vary with the number of stages in which a firm operates. • Costs may increase if there are problems managing dissimilar operations. • Vertical mergers are hardly ever strongly scrutinized by anti-trust regulators. • A firm will merge vertically to improve its competitiveness. 15
Vertical Mergers and Agreements _ Restrictive Agreements • Many vertical agreements greatly restrict the future choices of both parties. • A franchise contract between a carmaker and a dealer often prohibits the manufacturer from opening another outlet close by, that is, it specifies an exclusive territory. • Fast-food franchises often require the owner of an outlet to buy all its food through the parent organization, and the parent organization promises to always have food on hand to fulfill its side of the requirements contract 16
Vertical Mergers and Agreements _ Restrictive Agreements (cont.) • Manufacturers and retailers may have exclusive dealing contracts. • All these contracts contain vertical restrictions that limit the parties choices. • Often a parent will franchise outlets and hire employees to run others. • McDonald’s only owns 15% of its stores. • Starbucks Coffee has no individual franchises. 17
Sustaining & Extending Competitive Advantage 18
Barriers to Entry-Size and Commitment • Building barriers to entry that protect profits against existing and future competitors can be an important element of strategy. • Size and specificity may serve as barriers to entry. • A firm may need to be sufficiently large to achieve available economies of scale. • Firms may also need to invest in specific assets that are not easily redeployed to other uses and locations. A power plant for instance. 19
Intangible Assets: Trademarks & Advertising • A seller wants to inform customers about more than price—consistent quality, for instance, may engender customer loyalty. • A producer can use a brand name or trademark to assure buyers it will produce the quality they expect. • Signalling 20