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Competitive Dynamics and Competitive Rivalry

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  1. Chapter 5 Competitive Dynamics and Competitive Rivalry Michael A. Hitt R. Duane Ireland Robert E. Hoskisson

  2. To gain an advantageous • market position Competitive rivalry Competitors • Through competitive • behavior • Competitive actions • Competitive responses What results? What results? • Competitive Dynamics • Competitive actions and responses taken by all • firms competing in a market From Competitors to Competitive Dynamics Why? How?

  3. Outcomes • Market position • Financial performance • Competitive Analysis • Market commonality • Resource similarity • Interim Rivalry • Likelihood of Attack • First mover incentives • Organizational size • Quality • Likelihood of Response • Type of competitive action • Reputation • Market dependence • Drivers of Competitive • Behavior • Awareness • Motivation • Ability A Model of Competitive Rivalry feedback

  4. Market Commonality & Resources Similarity • Most industries’ markets are somewhat related in terms of technologies and core competencies • Resource similarity: the firm’s tangible and intangible resources are comparable to a competitor’s in terms of both type and amount • Firms with similar types and amounts of resources are likely to have similar strengths, weaknesses, and strategies

  5. Ability Awareness Motivation Drivers of competitive behavior is the extent to which competitors recognize the degree of their mutual interdependence, that results from market commonality and resource similarity Without available resources the firm lacks the ability to attack a competitor and to respond to the competitor’s actions Concerns the firm’s incentive to take action or to respond to a competitor’s attack and relates to perceived gains and losses

  6. Factors Affecting Likelihood of Attack: First Mover Incentives, Size of firm, Quality Type of Competitive action, Reputation, Market Dependence Factors Affecting Likelihood of Response:

  7. Competitive Dynamics: Competitive advantages are sustainable in slow-cycle markets One-of-a-kind competitive advantage leads to competitive success in a slow-cycle market Slow-Cycle Markets Fast-Cycle Markets Competitive advantages aren’t sustainable Competitors use reverse engineering to quickly imitate or improve on the firm’s products Non-proprietary technology is diffused rapidly

  8. 10 5 0 Gradual Erosion of a Sustainable Competitive Advantage Exploitation Returns from a Sustainable Competitive Advantage Counterattack Launch Time (Years)

  9. 15 10 5 0 Obtaining Temporary Advantages to Create Sustained Advantage Firm has already moved to next advantage Exploitation Returns from a Series of Replicable Actions Launch Counterattack Time (Years)

  10. Chapter 6 Corporate-Level Strategy Michael A. Hitt R. Duane Ireland Robert E. Hoskisson

  11. Two Levels of Strategy A diversified company has two levels of strategy • 1. Business-Level Strategy(Competitive Strategy) • How to create competitive advantage in each business in which the company competes • - low cost - differentiation • - focused low cost - focused differentiation • - integrated low cost/ • differentiation • 2. Corporate-Level Strategy(Company-wide Strategy) • How to create value for the corporation as a whole

  12. Business Unit Business Unit Business Unit Business Unit Key Questions in Corporate Strategy 1. What businesses should the corporation be in? 2. How should the corporate office manage the array of business units? Corporate Strategy is what makes the corporate whole add up to more than the sum of its business unit parts

  13. Incentives Resources Managerial Motives Reasons for Diversification Reasons to Enhance Strategic Competitiveness • Economies of scope • Market power • Financial economics

  14. Incentives Resources Managerial Motives Reasons for Diversification Incentives with Neutral Effects on Strategic Competitiveness • Anti-trust regulation • Tax laws • Low performance • Uncertain future cash flows • Firm risk reduction

  15. Incentives Resources Managerial Motives Reasons for Diversification Resources with varying effects on value creation and strategic competitiveness • Tangible resources • financial resources • physical assets • Intangible resources • tacit knowledge • customer relations • image and reputation

  16. Incentives Resources Managerial Motives Reasons for Diversification Managerial Motives (Value Reduction) • Diversifying managerial employment risk • Increasing managerial compensation

  17. Both Operational and Corporate Relatedness (Rare Capability and can Create Diseconomies of Scope) High Related Constrained Diversification Vertical Integration (Market Power) Related Linked Diversification (Economies of Scope) Unrelated Diversification (Financial Economies) Low Low High Value-creating Strategies of Diversification:Operational and Corporate Readiness Sharing: Operational Relatedness Between Businesses Corporate Readiness: Transferring Skills into Businesses Through Corporate Headquarters

  18. Adding Value by Diversification Diversification most effectively adds value by either of two mechanisms: • Economies of scope:cost savings attributed to transferring the capabilities and competencies developed in one business to a new business • Market power:when a firm is able to sell its products above the existing competitive level or reduce the costs of its primary and support activities below the competitive level, or both

  19. Alternative Diversification Strategies Related Diversification Strategies • sharing activities • transferring core competencies Unrelated Diversification Strategies • efficient internal capital market allocation • restructuring

  20. Alternative Diversification Strategies Related Diversification Strategies • sharing activities

  21. Resources and Diversification • Besides strong incentives, firms are more likely to diversify if they have the resources to do so • Value creation is determined more by appropriate use of resources than incentives to diversify

  22. Managerial Motives to Diversify Managers have motives to diversify • diversification increases size; size is associated with executive compensation • diversification reduces employment risk • effective governance mechanisms may restrict such motives

  23. Relationship Between Diversification and Performance Performance Dominant Business Related Constrained Unrelated Business Level of Diversification

  24. Capital Market Intervention and the Market for Managerial Talent Incentives Managerial Motives Resources Firm Performance Diversification Strategy Strategy Implementation Internal Governance Relationship Between Firm Performance and Diversification

  25. Acquisition and Restructuring Strategies

  26. Mergers and Acquisitions • Merger: a strategy through which two firms agree to integrate their operations on a relatively co-equal basis • Acquisition: a strategy through which one firm buys a controlling interest in another firm with the intent of making the acquired firm a subsidiary business within its own portfolio • Takeover: a special type of an acquisition strategy wherein the target firm did not solicit the acquiring firm’s bid

  27. Learn and develop new capabilities Reshape firm’s competitive scope Overcome entry barriers Increase diversification Acquisitions Cost of new product develop Increase speed to market Increase market power Lower risk compared to develop new products Reasons for Making Acquisitions

  28. Reasons for Making Acquisitions Increased Market Power • Factors increasing market power • when a firm is able to sell its goods or services above competitive levels or • when the costs of its primary or support activities are below those of its competitors • usually is derived from the size of the firm and its resources and capabilities to compete • Market power is increased by • horizontal acquisitions • vertical acquisitions • related acquisitions

  29. Reasons for Making Acquisitions Overcome Barriers to Entry • Barriers to entry include • economies of scale in established competitors • differentiated products by competitors • enduring relationships with customers that create product loyalties with competitors • acquisition of an established company • may be more effective than entering the market as a competitor offering an unfamiliar good or service that is unfamiliar to current buyers • provides a new entrant with immediate market access

  30. Reasons for Making Acquisitions Cost of New Product Development and Speed to Market • Significant investments of a firm’s resources are required to • Develop new products internally • introduce new products into the marketplace • Acquisition of a competitor may result in • more predictable returns • faster market entry • rapid access to new capabilities

  31. Reasons for Making Acquisitions Lower Risk Compared to Developing New Products • An acquisition’s outcomes can be estimated more easily and accurately compared to the outcomes of an internal product development process • Therefore managers may view acquisitions as lowering risk

  32. Reasons for Making Acquisitions Increased Diversification • It may be easier to develop and introduce new products in markets currently served by the firm • It may be difficult to develop new products for markets in which a firm lacks experience • it is uncommon for a firm to develop new products internally to diversify its product lines • acquisitions are the quickest and easiest way to diversify a firm and change its portfolio of business

  33. Reasons for Making Acquisitions • Firms may use acquisitions to reduce their dependence on one or more products or markets • Reducing a company’s dependence on specific markets alters the firm’s competitive scope Reshaping the Firms’ Competitive Scope

  34. Reasons for Making Acquisitions: • Acquisitions may gain capabilities that the firm does not possess • Acquisitions may be used to • acquire a special technological capability • broaden a firm’s knowledge base • reduce inertia Learning and Developing New Capabilities

  35. Resulting firm is too large Inadequate evaluation of target Managers overly focused on acquisitions Acquisitions Large or extraordinary debt Too much diversification Integration difficulties Inability to achieve synergy Problems With Acquisitions

  36. Problems With Acquisitions Integration Difficulties • Integration challenges include • melding two cultures • linking different financial and control systems • building effective working relationships styles • resolving problems firm’s executives • loss of key personnel from the acquired firm’s

  37. Problems With Acquisitions Inadequate Evaluation of Target • Evaluation requires hundreds of issues to examined, including • financing for the intended transaction • differences in cultures between the firm • tax consequences of the transaction • actions to meld the two workforces • Ineffective due-diligence process may • paying excessive premium for the target company

  38. Problems With Acquisitions Large or Extraordinary Debt • Firm may take on significant debt and High debt can • increase the likelihood of bankruptcy • lead to a downgrade in the firm’s credit rating • preclude needed investment in activities that contribute to the firm’s long-term success

  39. Problems With Acquisitions Inability to Achieve Synergy • Synergy exists when assets are worth more when used in conjunction with each other than when they are used separately • Firms experience transaction costs when they use acquisition strategies to create synergy • Firms tend to underestimate indirect costs when evaluating a potential acquisition

  40. Problems With Acquisitions Too Much Diversification • Diversified firms must process more information of greater diversity • Scope created by diversification may cause managers to rely too much on financial rather than strategic controls to evaluate business units’ performances • Acquisitions may become substitutes for innovation

  41. Problems With Acquisitions Managers Overly Focused on Acquisitions • Managers in target firms may operate in a state of virtual suspended animation during an acquisition • Executives may become hesitant to make decisions with long-term consequences until negotiations have been completed • Acquisition process can create a short-term perspective and a greater aversion to risk among top-level executives in a target firm

  42. Problems With Acquisitions Too Large • Additional costs may exceed the benefits of the economies of scale and additional market power • Larger size may lead to more bureaucratic controls • Formalized controls often lead to relatively rigid and standardized managerial behavior • Firm may produce less innovation

  43. Attributes of Effective Acquisitions Attributes Results Complementary Assets or Resources Buying firms with assets that meet current needs to build competitiveness Friendly Acquisitions Friendly deals make integration go more smoothly Careful Selection Process Deliberate evaluation and negotiations are more likely to lead to easy integration and building synergies Maintain Financial Slack Provide enough additional financial resources so that profitable projects would not be foregone

  44. Attributes of Effective Acquisitions Attributes Results Low-to-Moderate Debt Merged firm maintains financial flexibility Sustain Emphasis on Innovation Continue to invest in R&D as part of the firm’s overall strategy Has experience at managing change and is flexible and adaptable Flexibility

  45. Restructuring Activities • Downsizing • Wholesale reduction of employees • Downscoping • Selectively divesting or closing non-core businesses • Reducing scope of operations • Leads to greater focus • Leveraged Buyout (LBO) • A party buys a firm’s entire assets in order to take the firm private.

  46. Loss of human capital Downsizing Lower performance Downscoping Leveraged buyout Emphasis on strategic controls High debt costs Reduced debt costs Reduced labor costs Higher performance Higher risk Restructuring and Outcomes