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### Transcript of Competitor Analysis Final

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US market stagnant

South Korea

Max. market share =6%

VLM Corporation alsoconsidering entering

the market

FranceRobinet with market

share = 82%

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Elements of Competitor Analysis

Game

Theory

Behavioral Theory

Analysis Framework

Data Sources

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Game Theory

Framework for Modeling Competitive decision making.

Assumptions :

1. Those playing game have good grasp on game.

2. All are rational and profit is the only motivation.

Step 1

How do I frame the competitive decisionproblem?

Step 2

How do I use this framing to predictcompetitive outcomes?

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Types of Strategies in Game Theory

Provides complete definition how a player will play agame.

Determines the move a player will make for any situation.

A player's strategy set is the set of pure strategies.

Purestrategy

Is an assignment of probability to each pure strategy.

Since probabilities are continuous, there are infinitelymany mixed strategies available to player, even ifstrategy set finite.

One can regard a pure strategy as a degenerate case ofa mixed strategy : particular pure strategy selected withprobability 1 and every other strategy with probability 0

Mixedstrategy

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Nash Equilibrium in Game Theory

Types ofNash Equilibria

Generally, every game has one Nash equilibrium :outcome in which players have no incentive tounilaterally deviate from their respective choice actions.

Pure strategy Nashequilibria areNash

equilibria where all

players are playing

pure strategies.

Mixed strategy

Nash equilibriaare equilibria

where at least

one player is

playing a mixed

strategy.

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South Korea

If firm the only entrant : Could sell 200,000 units each year withprevailing market price.

Fixed costs for WCC (and possibly for VLM and Robinet) : \$ 2 Mn

Variable Cost for WCC : \$ 30 per unit

If both firms enter market : each firm sells 150,000 units

Price would fall depending on cost structure of VLM.

Payoffs Calculation for all possible outcomes :

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South Korea

Identical Cost

If VLMs variable cost same as

WCC, then price falls to \$ 45 from\$ 55.

Implications

Each player prefers optimal action

of entering market irrespective ofother players choice i.e., enter-

enter outcome : Dominant

Strategy

One equilibrium : Both entering

250 , 250 3000 , 0

0 , 3000 0 , 0

Enter Dont Enter

Enter

DontEnter

VLM

WCC

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South Korea

Low Cost Scenario

VLM unit Cost = \$20

Price under dual entry = \$40

VLM

Enter Dont Enter

Enter

WCC

Dont

Enter

Implications

WCC doesnt have dominant

strategy since optimal decisiondepends on other players choice.

VLM always prefers to enter thus

enter is dominant strategy for

VLM.

One equilibrium : VLM entering

and WCC not entering

-500,1000 3000,0

0,5000 0,0

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South Korea

High Cost Scenario

VLM unit Cost = \$40

Price under dual entry = \$50

VLM

Enter Dont Enter

Enter

WCC

Dont

Enter

Implications

VLM does not have dominant

strategy.

WCC prefers to enter irrespective

of other players choice :

dominant strategy

One equilibrium : WCC entering

and VLM not entering

1000,-500 3000,0

0,1000 0,0

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France

Cost Structure

WCC expected to capture 250000

units if match Robinets price.

Robinets cost structure assumed to

be same as WCCs

Price under accommodation : \$45

Price under price war : \$ 35

Fight Accommodate

Enter

Dont

Enter

Implications

Two equilibrium outcomes :neither

player has incentive to unilaterally

deviate.

WCC not moves from dont enter to

enter if Robinet is fight. Robinet

doesnt move from accommodate

to fight if WCC enter.

-500, 1500 2000,8000

0,16250 0,16250

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Game Tree for France Entry Decision

Sequential move game rather than simultaneous move game

in South Korea.

-500,1500

Robinet Fight

Enter

WCC

Dont Accommodate 2000,8000

Enter

0,16250

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Caveats in application of Game Theory

Game models used static games consisting of a singlemove by each player at single point in time.

Present scenario is dynamic game involving multiplerelated decisions and interactions over time.

Should know competitors cost structure and perhapsother factors affecting his decision making e.g. BehavioralBiases.

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Behavioral Theory

Bounded Rationality orInformation Processing

limitations (owing toscarcity of info ,time,willingness , ability to

analyze).

Cognitive frailties such as

antagonism andemotion.

Heuristics or rules ofthumb : Tried and tested

methods but may lead tonon profit making

situations.

Game theory : actions based on maximizing payoffs.

Behavior Theory : Sometimes decisions based on behavioral biases and not

on financial motives.

Reasons behind existence of behavioral bias :

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Types of behavior biases

Generalizing situation based on similar past situations.

Underestimation of error and unreliability in small sample data.

Robinet might Fight back based on successful pastexperience.

Detailed review of competitor history required in similarsituations.

Representativeness BiasRepresentativeness Bias

Firms overestimate their potential and success likelihood.

VLM might overestimate its capabilities even if game theorynegates under high cost situation.

Applicable to Western Connector as well.

Overconfidence BiasOverconfidence Bias

Decision maker seeks info that confirms to belief rather thanseeking refuting evidences.

Have counter-evidence but perceive confirmatory evidence inbetter light.

Robinet might stick to fight rather than looking for counterexamples.

Confirmation BiasConfirmation Bias

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Decision makers value goods more when they ownthem than when they do not.

Firms perceive 10% market share loss as moredamaging than 10% market share gain foregone evenwhen financial implications of two situations same.

Robinet (losing market share) behave moreaggressively than VLM(gaining market share)

Endowment

Effect

Take actions intended to support previous decisions

which have not turned out well. If Robinet made investements in marketing capacity , it

would fight to preserve market share to justifyprevious investments.

Justify pastactions

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Analysis Framework

What drives thecompetitor

Future goals(at all mgmt levels)

What the competitoris currently doing

Capabilities(Strengths and weakness)

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Porters Analysis Framework

Competitors Keyoperating policies

Analysis will providecompetitors abilityto react to strategicmoves

Analysis will help toidentify the biasesand blind spots

Analysis willprovide how likelywill competitor willchange strategyand the Vigor

Future

Goals Assumptions

CurrentStrategy

Capabilities

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Conclusion

VLM was estimated to have lower costs than Western Connectors, andmight also be willing to incur greater short-term losses

Larsen steered Western Connector away from South Korea Marketentry recognizing that the game was more like the low cost scenariothan the high-cost

Robinet did not respond aggressively owning to high cost of fightingand perceived loyalty of its customers

On the other hand, Western Connector successfully entered FrenchMarket

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Conclusion(cont..)

The most fundamental lesson of competitor analysis is that strategicdecision-making depends critically upon the anticipated actions ofcompetitors

Successful firms thoroughly evaluate the incentives, biases, and likely-actions of rivals before taking action

To frame Competitive Decisions

Identify Behavioral Tendencies

Research Competitor Attributes

ANTICPATE competitive actions

The elements of competitor analysis through WCCs experience provide

the basic tools necessary