Peng Chapter 11 (2nd Edition)

Global Business 2eChapter 11

Managing GlobalCompetitiveDynamics

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LEARNING OBJECTIVES

After studying this chapter, you should be able to:1. Understand the industry conditions conducive for cooperation

and collusion.2. Outline how formal institutions affect domestic and

international competition.3. Articulate how resources and capabilities influence

competitive dynamics.4. Identify the drivers for attacks, counterattacks, and signaling.5. Discuss how local firms fight multinational enterprises (MNEs).6. Participate in two leading debates concerning global competitive

dynamics.7. Draw implications for action.

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GLOBAL COMPETIVE DYNAMICS

Competitive dynamicsActions and responses undertaken by competing firms.

Competitor analysisProcess of anticipating rivals’ actions in order to both revise a firm’s plan and prepare to deal with rivals’ response.

Application to Opening Case?

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COMPETITION, COOPERATION, AND COLLUSION

Competition

While businesses compete for market share (“war”), they also cooperate and collude (“peace”).

Collusion

Collective attempts to reduce competition.

Tacit Collusion

Indirect collusion through signaling to reduce output and maintain prices (legal).

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COMPETITION, COOPERATION, AND COLLUSION

Explicit collusion

Firms directly negotiate output and pricing and divide markets (illegal).

Cartel

An output- and price-fixing entity involving multiple competitors.

Trust

A cartel in which members have to trust each other to honor agreements.5

COMPETITION, COOPERATION, AND COLLUSION

Antitrust laws

Cartels/trusts have been labeled “anticompetitive” and outlawed by antitrust laws in various countries.

Duration of Cartels

Cartels often collapse (average duration of six years) because of incentive to “cheat” as illustrated in the prisoner’s dilemma. 6

COMPETITION, COOPERATION, AND COLLUSION

Prisoners’ dilemmaGame in which two prisoners are suspected of a major joint crime but police do not have strong evidence. The outcome depends on whether they collude or defect.Silence on the part of both suspects would lead to the greatest benefit (freedom). The risk from not confessing when the other party confesses is such that typically both prisoners confess.

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COMPETITION, COOPERATION, AND COLLUSION

Prisoner’s Dilemma (Airline Example)If both airlines collude (keep price at $500), the payoff for each is $50,000.But, there is the incentive to cheat (i.e., compete by dropping the price) because the payoff if the other does not cheat is $60,000.If both cheat, the payoff is the lowest - $30,000.

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COMPETITION, COOPERATION, AND COLLUSION

So far, we have learned that firms benefit from COLLUSION, but there are incentives CHEAT (i.e., COMPETE).

Are there industry characteristics that make collusion MORE LIKELY or LESS LIKELY?

If so, what are those characteristics? 10

Industry Characteristics that Make Collusion Possible

Concentration ratio

If few firms (high concentration), collusion easier. If many firms (low concentration), competition more likely.

Price leader

Collusion easier if price leader that can set prices and has resources to punish defectors. Collusion more difficult if no price leader.

Homogeneous products

Rivals compete on price (which tends to be “cut throat”) rather than differentiation therefore incentive to collude. 11

COOPERATION AND COLLUSION

High barriers to entry

To overcome high barriers, new entrants might ignore the existing industry order and introduce new products and technologies. Incumbent firms more likely to collude to keep new entrants out.

Market commonality

Promotes collusion as firms are able to retaliate in markets important to competitors (cross-market retaliation). Multimarket firms respect their rivals’ spheres of influence in certain markets leading to tacit collusion (mutual forbearance).

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INSTITUTIONS GOVERNING DOMESTIC AND INTERNATIONAL COMPETITION

Effectiveness of a firm’s actions depends on:

1. Domestic and international institutions governing international competitive dynamics.

2. Firm-specific resources and capabilities.

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Formal Institutions Governing Domestic Competition: A Focus on AntitrustCompetition policy

Determines the institutional mix of competition and cooperation that gives rise to the market system.

Antitrust policy

Government policies designed to combat monopolies and cartels. It seeks to balance efficiency (which might arise for larger firms) with fairness (market access for new and smaller firms).

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Formal Institutions Governing Domestic Competition: A Focus on Antitrust

Japanese vs. US Competition Policy Japanese competition policy is pro-

incumbent and pro-producer. In contrast, US competition policy is pro-

competition and pro-consumer . As a result of antitrust laws, the US in

general tends to be more competitive and have lower consumer prices (except drugs and medicine, see Table 11.2).

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Formal Institutions Governing Domestic Competition: Antitrust

US Competition and antitrust policy focus on:

Collusive price setting

Price setting by monopolists or collusion parties at a level higher than the competitive level.

Predatory pricing

Setting prices below cost while intending to raise prices after eliminating rivals to cover its losses in the long run (“an attempt to monopolize”).

Predatory pricing cases have been difficult to win in US courts.19

Formal Institutions Governing International Competition: Antidumping

Dumping

Selling goods at below cost or home market prices and planning to raise prices after eliminating rivals.

Antidumping laws

Laws that make it illegal for an exporter to sell goods below cost abroad or below home market prices with the intent to raise prices after eliminating local rivals.

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Formal Institutions Governing International Competition: Antidumping

OECD study in Australia, Canada, EU and US found that 90% of cases found to be dumping would never have been found to be illegal if it were a domestic firm making a domestic sale.

Foreign firms are at a disadvantage by formal rules governing antidumping.

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Resources InfluencingCompetitive Dynamics

Resource similarity

If resources are similar, firms will have similar abilities to engage in competitive actions and their strategies will be similar. Note that similar resources may also be a deterrent to competitive action because firms have the resources to retaliate especially if markets are similar.

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ATTACK, COUNTERATTACK,AND SIGNALING

Attack

An initial set of actions to gain competitive advantage. To be successful, must understand awareness, motivation, and capabilities.

Counterattack

A set of actions in response to attack affected by awareness, motivation, and capabilities. Firms are less likely to respond if they are unaware, not motivated to defend (markets are unimportant), or don’t have the capabilities to respond.

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ATTACK, COUNTERATTACK,AND SIGNALING

Cooperation and Signaling Firms may not counterattack but

instead signal their intent to cooperate (Toyota signaled GM that it would raise its prices in 2005 when GM was in trouble).

Filing an antidumping petition or lawsuit is also a form of signaling (Cisco vs. Huawei in Opening Case).

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LOCAL FIRMS VERSUSMULTINATIONAL ENTERPRISES

How do local firms respond to attacks from MNEs? Four strategies:

Defender

Firm customizes products to local market (e.g., local Israeli firms customized cosmetics to local Middle Eastern climate).

Extender

Firm extends home-grown competencies to countries nearby (e.g., Asian paints tailors strategies to paint consumers in India who want small containers).26

LOCAL FIRMS VERSUSMULTINATIONAL ENTERPRISES

Dodger

Can’t compete directly with MNEs, instead forms JV to compete locally (e.g., Chinese automobile industry, Skoda in the Czech Republic).

Contender

Firms are able to compete with foreign MNEs through rapid learning (e.g., TCL, Huawei).

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DEBATES AND EXTENSIONS

Competition vs. Antidumping

Debate is that selling below cost (dumping) is a form of competition and many firms do it domestically. In addition, given globalization, it is very difficult to drive out all competitors and then raise prices.

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DEBATES AND EXTENSIONS

Competitive Strategy vs. Antitrust PolicyDebate is that “anticompetitive” actions (defeating competition) are what competition is all about. Today’s environment is different from when antitrust laws were made (1890 for the Sherman Act). A large firm in one country (e.g., Boeing) isn’t a monopoly because of foreign rivals (e.g., Airbus).30

MANAGEMENT SAVVY

Managers must understand that firms engage in both competition and cooperation and know the conditions under which each is best.

Understand what affects actions and responses (for both MNEs and local firms in emerging markets).

Know the rules governing domestic and international competition.

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