intra-industry analysis game theory competitor analysis segmentation strategic groups outline

Intra-Industry AnalysisIntra-Industry Analysis

• Game theory

• Competitor Analysis

• Segmentation

• Strategic Groups

OUTLINE

The Contribution of Game Theory to Competitive Analysis

The Contribution of Game Theory to Competitive Analysis

Main value:1. Framing strategic decisions as interactions between competitors2. Predicting outcomes of competitive situations involving a few

players

Some key concepts:1. Competition and Cooperation—Game theory can show conditions where

cooperation is more advantageous than competition {P.D.}2. Deterrence—changing the payoffs in the game in order to deter

a competitor from certain actions3. Commitment—irrevokable deployments of resources that

give creditability to threats4. Signalling—communication to influence a competitor’s decision

Problems of game theory:Useful in explaining past competitive behavior—weak in predicting future competitive behavior. {SCENARIOS}What’s the problem? — Multitude of models, outcomes highly sensitive to small changes in assumptions

Complementors & Competitors

• Complementor: customer values your product MORE when they have the other player’s product than when they have yours alone.

• Competitor: customer values your product LESS when they have the other player’s product than when they have yours alone. May cooperate to develop market & infrastructure.

From Thinking Strategically• Prisoner’s Dilemma: Competitor pricing, MAD, Employer/Union, Hostage

Dilemma.• To lead or not to lead: If in lead, can imitate as soon as follower’s intentions

are known, or when follower’s success as been assessed.• Look before you leap - use your bargaining power when you’ve got it.• Mix your plays• Opponent’s choices & actions tell you information Monty Hall’s Let’s Make a

Deal.• Pride & irrationality can’t be ignored - people.• Moving first & being intransigent.• Moving second after seeing what your opponent did.• 2 kinds of interaction: sequential & simultaneous.• For sequential, Rule #1: look forward & reason backward. Draw a game tree.• For simultaneous, build table, check for dominant strategies, (Rule #2: if you

have one, use it!), then dominated strategies (Rule #3: eliminate dominated strategies), Rule #4: look for an equilibrium, a pair of strategies in which each player’s action is the best response to the others.

Thinking Strategically, Dixit & Nalebuff, 1991

• If Newcleaners (N) enters and Fastcleaners accomodates, N makes $100k.

• If N enters and Fastcleaners starts price war, N loses $200k.

• What should N do?

Newcleaner’s game

Thinking Strategically, Dixit & Nalebuff, 1991, p. 38

Newcleaner’s game map

Thinking Strategically, Dixit & Nalebuff, 1991, p. 38

Larry’s choice

• Larry, Mo, & Curly are in a duel and will shoot once in that order for 2 rounds.

• Outcome ranking: sole survivor, then one of 2 survivors, then noone gets killed, then (& worst) you get killed.

• Larry hits 30% of time, Mo 80%, Curly 100%.

• What should Larry do?

Thinking Strategically, Dixit & Nalebuff, 1991, p. 329

David & Goliath’s choices.

>David produces 1 slingshot per quarter, Goliath 2, & no flexibility in output.>Once exit industry, can’t come back in.

Thinking Strategically, Dixit & Nalebuff, 1991, p. 340

Thinking Strategically, Dixit & Nalebuff, 1991, p.343

What Price a Dollar?

• Bidding proceeds at 5 cent increments.

• Highest bidder gets the dollar.

• The highest AND the second highest bidder must pay their bid.

Thinking Strategically, Dixit & Nalebuff, 1991, p. 349

From Co-opetition

• Players: when you enter a game, you change it. Get paid to play.

• Added Value: Size of the pie when you are in MINUS size of pie when you are out. Red & Black card pair = $100.

• Rules: w/ customers, suppliers, government sets many, changing. Most Favored Customer clause.

• Tactics: Actions to your benefit.• Scope: Boundaries of the game.

Co-opetition, Brandenburger & Nalebuff, 1996

Value Net

Co-opetition, Brandenburger & Nalebuff, 1996

University Value Net

Co-opetition, Brandenburger & Nalebuff, 1996

Co-opetition, Brandenburger & Nalebuff, 1996

PREDICTIONS

• What strategy changes will the competitor initiate?

• How will the competitor respond to our strategic initiatives?

OBJECTIVESWhat are competitor’s current goals?Is performance meeting there goals?How are its goals likely to change?

STRATEGYHow is the firm competing?

ASSUMPTIONSWhat assumptions does the competitorhold about the industry and itself?

RESOURCES & CAPABILITIESWhat are the competitors’ key strengths and weaknesses?

A Framework for Competitor Analysis A Framework for Competitor Analysis

{Sources of information}

Segmentation Analysis: The Principal Stages

Segmentation Analysis: The Principal Stages

• Identify key variables

and categories.

• Construct a segmentation matrix

• Analyze segment attractiveness

• Identify KSFs in each segment

• Analyze benefits of broad vs. narrow scope.

Identify segmentation variablesReduce to 2 or 3 variablesIdentify discrete categories for each variable

Potential for economiesof scope across segmentsSimilarity of KSFsProduct differentiation benefitsof segment focus

The Basis for Segmentation: Customer and Product Characteristics The Basis for Segmentation: Customer and Product Characteristics

Opportunities forDifferentiation

Opportunities forDifferentiation

Characteristics of the Buyers

Characteristics of the Buyers

Characteristics of the Product

Characteristics of the Product

Industrial buyersIndustrial buyers

Household buyersHousehold buyers

Distribution channelDistribution channel

Geographicallocation

Geographicallocation

*Size*Technical sophistication*OEM/replacement

*Size*Technical sophistication*OEM/replacement

*Demographics*Lifestyle*Purchase occasion

*Demographics*Lifestyle*Purchase occasion

*Size*Distributor/broker*Exclusive/ nonexclusive*General/special list

*Size*Distributor/broker*Exclusive/ nonexclusive*General/special list

*Physical size*Price level*Product features*Technology design*Inputs used (e.g. raw materials)*Performance characteristics*Pre-sales & post-sales services

*Physical size*Price level*Product features*Technology design*Inputs used (e.g. raw materials)*Performance characteristics*Pre-sales & post-sales services

Segmenting the European Metal Can IndustrySegmenting the European Metal Can Industry

Food Fruit Juice Pet food Soft drink Beer Oil

Steel 3-piece

Steel 2-piece

Aluminum 2-piece

General cans

Composite cans

Aerosol cans

Segmenting the World Automobile MarketSegmenting the World Automobile Market

REGION US& Canada W.Europe E.Europe Asia Lat America Australia Africa

Luxury Cars

Full-size sedans

Mid-size sedans

Small sedans

Station wagons

Passenger minivans

Sports cars

Sport-utility

Pick-up trucks

0

5

0

10

15

20

25%

100%Share of industry revenue

Auto loans

Leasing

Warranty

Gasoline

Auto insurance

Aftermarket parts

Auto rentalO

per

atin

g m

arg

in

Auto manufacturing

New car dealers

Used car dealers

Service & repair

Vertical Segmentation & Industry Profit Pools—The US Auto Industry

Vertical Segmentation & Industry Profit Pools—The US Auto Industry

SEGMENT

Low price bicycles sold primarily through department and discount stores, mainly under the retailer’sown brand (e.g. Sears’ “Free Spirit”);

KEY SUCCESS FACTORS

* Low-costs through global sourcing of components & low-wage assembly.* Supply contract with major retailer.

Leading competitors: Taiwanese & Chinese assemblers,some U.S manufacturers, e.g. Murray Ohio, Huffy

Medium-priced bicycles sold primarily under manufacturer’s brandname and distributed mainly throughspecialist bicycles stores;

*Cost efficiency through large scale operation and either low wages or automated manufacturing.*Reputation for quality (durability, reliability) through effective marketing to dealers and/or consumers.* International marketing & distribution.

Leading competitors: Raleigh, Giant, Peugeot, Fuji

*Quality of components and assembly, Innovation in design (e.g. minimizing weight and wind resistance).*Reputation (e.g. through success in racing, through effective brand management).*Strong dealer relations.

Similar to low-price bicycle segment.

High-priced bicycles for enthusiasts.

Children’s bicycles (and tricycles) soldprimarily through toy retailers (discount toy stores, department stores, and specialist toy stores).

Segmentation and Key Success Factors in the U.S. Bicycle Industry Segmentation and Key Success Factors in the U.S. Bicycle Industry

Focus vs. Broad, Branding

Strategic Group AnalysisStrategic Group Analysis

A strategic group is a group of firms in an industry following the same or similar strategy.

Identifying strategic groups:• Identify principal strategic

variables which distinguish firms.

• Position each firm in relation

to these variables.• Identify clusters.

Broad

PRODUCT RANGERANGE

Narrow

National GEOGRAPHICAL SCOPE Global

NATIONALLY- FOCUSED, SMALL, SPECIALIST

PRODUCERS e.g., Bristol (U.K.), Classic Roadsters

(U.S.), Morgan (U.K.)

NATIONALLY FOCUSED, INTERMEDIATE LINE

PRODUCERS

e.g. Tofas, Kia, Proton, Maruti

REGIONALLY-FOCUSED BROAD-LINE PRODUCERS

e.g. Fiat, PSA, Renault,

PERFORMANCE CAR PRODUCERS

e.g., Porsche, Maserati, Lotus

LUXURY CAR MANUFACTURERS

e.g., Jaguar, Rolls Royce, BMW

GLOBAL SUPPLIERS OF NARROW MODEL RANGE e.g., Volvo, Subaru, Isuzu,

Suzuki, Saab, Hyundai

GLOBAL, BROAD-LINEPRODUCERS

e.g., GM, Ford, Toyota, Nissan, Honda, VW, Daimler

Chrysler

Strategic Groups in the World Automobile Industry Strategic Groups in the World Automobile Industry

Geographical Scope

0 10 20 30 40 50 60 70 80

Ver

tica

l Bal

ance

00.

51.

01.

52.

0

NATIONALPRODUCTION COMPANIES

INTEGRATED INTERNATIONAL

MAJORS

NATIONALLY-FOCUSEDDOWNSTREAM COMPANIES

INTEGRATED DOMESTICOIL COMPANIES

Chevron Royal Dutch-Shell Gp.

Exxon-Mobil

Statoil

PDVSA

Kuwait Petroleum

Petronas

Petrobras

RepsolNippon

Tosco

BP-Amoco

TexacoPhillips

Pemex

Indian Oil

ENI

INTEGRATED OIL MAJORSINTERNATIONALUPSTREAM,REGIONALLYFOCUSEDDOWNSTREAM

IranNOC

E.g. Neste

PhillipsENI

Elf-Fina-TotalRepsol INTERNATIONAL

DOWNSTREAM OIL COMPANIES

INTERNATIONALUPSTREAMCOMPANIES

Enterprise

PremierOil

YPF

Strategic Groups Within the World Petroleum Industry Strategic Groups Within the World Petroleum Industry