Strategy II

Conditions likely to make rivalry severe: more detail
• • • • • • • • • •
Undifferentiated products Low switching costs for customers Strong exit barriers Excess capacity

Intensity of competition

Ease of collusion Presence of many sellers Some firms’ cost advantage over others Inability to adjust prices quickly Large and infrequent sales orders Absence of “facilitating practices” Absence of a history of cooperative pricing

Managing Rivals

• Potential

Entrants • Deter • Accommodate

• Existing

Competitors • Fight • Cooperate • Restructure

Identifying Potential Rivals
•
Be aware of “outside” firm’s economic motivations

• • •

Firms with relevant capabilities and underutilized resources in stagnant or declining industries (economies of scope) Firms where value chain overlaps (economies of scope) Firms in the same vertical industry chain (vertical integration for bargaining power or economies of coordination)

•

Be aware of the strategic trajectories of “outside” firms

• • •

Firms that take minority ownership stakes of existing rivals Recent entrants to related industries (see above) Entrants to the same industry in other geographic markets

Deterrence Strategies (1)
Strategies to increase the cost and risk of entry

• • •

Erect structural barriers: licenses, regulation Reduce the quality of information on costs and demand • Increases uncertainty Make retaliation more credible and accommodation less credible • Raise (your own) exit costs • Build financial reserves • Select high fixed-cost technologies • Establish a reputation for aggressive behavior

Deterrence Strategies (2)
Strategies to reduce the incentive to enter

• •

Use limit pricing: price lower than what is profit maximizing in the short term to deter entry Idea is to exploit a potential entrant’s information disadvantage about true market conditions

When is this strategy likely to deter entry?

• • •

Incumbent holds a true