Competitive Interactions • Outcome of all strategy changes depends on competitive reactions. • Game theory offers a structured way to think about competitive reactions. • Strategic foresight • anticipate reactions = think forward • make decisions = reason backwards
• Know yourself as well as others • Players, feasible strategies, payoffs, preferences • Put yourself in the competitor’s shoes
• Think about impact of repeated interactions • Markstrat equals one decade of competitive interactions
• Build cooperation within the group • Weakest decision in the set has key impact in Markstrat
Example of depth-of forward thinking: sequential entry game Number of firms entered
Payoff per firm before advertising
1
20
2
16
3
7.5
4
0
Rules To enter the entrant must spend twice the advertising of an incumbent don’t forward think forward If you think a littleyou predict two firms will enter and they will each make Firm 12.252 managers realize they must advertise 3.75 to deter the third entrant •Why? and •To the deter payoffathey is 12.25 not 16! thirdsee entry each incumbent must spend 3.75 on advertising Hence Firm 1 can deter Firm 2 with 6.125 (entrant(2x6.125=12.25) would then spendand 2x3.75=7.5) advertising their •Hence gets 16-3.75 = payoff wouldeach thenincumbent be 20-6.125=13.88 12.25 Conclusion foresight •This iswith better than first firm deterring (entrant would spend 2x8 onlythe onesecond firm should enter! =16, incumbent would receive 20Research 8=12)demonstrates that most people don’t think forward very far!
Why? • Human decision makers • No anticipation • high cognitive cost • psychological reasons • Misunderstanding competitors • feeling of superiority • attribution error • Predicting incorrectly • introspective theorizing • false consensus effect
Rule 7: Strategic Thinking
“Let’s take one step at the time” is the wrong approach to strategic thinking.
Rule 8: Competitive Reactions
You need to understand competitors’ ability and motivation to anticipate their reactions.
What can you do about it? • Look beyond tangible assets that are typically the focus of SWOT analyses
• decision makers • organization’s reputation • Put yourself in your competitors’ shoes
• Invest: use a ‘devil’s advocate’ or put a ‘red’ team in place • Scenarios: explicitly spell out assumptions about competitors’ behavior and the uncertainty about it
Scenarios • Stories describing a possible future • Significant events, actors & their motivation, how things function • NOT: • Preferences, projections or predictions • Best case/worse case • Built from key uncertainties • Role • • • •
Confront assumptions Register degrees of uncertainty Widening perspectives Addressing dilemmas and conflicts
Yes
Beer in China: reform scenario
Yes Reform No
Multiple segments No Yes Multiple segments No
Consolidation, oligopoly & multiple segments
• • • • • • •
Reform relatively complete Many local players acquired or fail Major regional and national players Increasing brand awareness Foreign players can survive with branding & price premium (viable segment emerges) Local players can survive with low-cost or good brand recognition Industry makes reasonable profits
Portfolio Competition*
*Also called multimarket or multipoint competition
Market Growth 10 % Low High
Market Attractiveness
BCG Growth-Share Matrix Stars
Question Marks
Cash Cows
Dogs
10
High 1.0 Low Relative Market Share
Competitive Position
0.1
Internal Balance of Portfolio • Firm B
Stars
Question Marks
Cash Cows
Dogs
Market Attractiveness
Market Attractiveness
• Firm A
Stars
Question Marks
Cash Cows
Dogs
Competitive Position
Competitive Position
Competitive Goals of Portfolio (contribution after marketing $m) 20
Takeaways • All strategy involves competitive reaction • Think ahead two or three moves & reason back to your decision • Use scenarios and/or devil’s advocates to make uncertainties clearer & to understand the situation as seen from your competitors’ shoes • Where economies of scale or scope matter: • View competition across all the markets in which you and your competitors compete • Understand the organizational structures and profit sources of your competitors
