1 Competitor Analysis

Competitive Rivalry & Collusion

10/3/11

2 Competitor Analysis

Quiz 1: 10 Minutes10/3/11

4 Competitor Analysis

Agenda

Using game theory to predict rival’s actions and responses to a given strategy Game theory & prisoner’s dilemma Sequential/Extended form games

Exercise: Knee-jerk reactions: 2 player repeated game 4 player repeated game

Behavioral approach to anticipating rivals

5 Competitor Analysis

Can you beat the prisoner’s dilemma?

6 Competitor Analysis

Prisoners’ Dilemma Prisoner’s Dilemma is a situation where

individuals’ incentives and those of the group are in conflict: The group would jointly benefit from

cooperating, but… Each group member has an incentive not to

cooperate.

Cooperation tends to break down unless there is some mechanism to enforce cooperation.

We see this in many settings and knowing how to strategize in this context is critical. Politics: Arms races, pollution Sports: Steroid use Business: Price or advertising wars On campus: Group projects? Other?

7 Competitor Analysis

Formal Definition Prisoner’s Dilemma: Simultaneous-move

non-cooperative game where all players have a dominant strategy, and the resulting Nash equilibrium is Pareto inefficient.

Non-Cooperative Game: Each player seeks to maximize his/her individual payoff and assumes others do the same.

Dominant Strategy: A strategy that is always the best choice for a player, regardless of what other players choose to do.

Nash equilibrium: A combination of strategies where no player would wish to unilaterally change his/her strategy.

Pareto inefficient: The game has another possible outcome that would make at least one player better off, without making other players any worse off.

8 Competitor Analysis

Example 2

RedC D

BlueB

A

$500

$700

$200

$400

$1000

$400

$100

$300

Prisoner’s Dilemma? • Dominant strategies?• Nash equilibrium?• Pareto inefficient?

9 Competitor Analysis

Example 2

RedC D

BlueB

A

N$500

$700

$200

$400

$1000

$400

$100

$300

Prisoner’s Dilemma? • Dominant strategies?• Nash equilibrium?• Pareto inefficient?

OneOneNo

10 Competitor Analysis

Genzyme v. J&J: Can they get the R&D “war” under control?

J&J (Orthovisc)3 Shot 1

shot

Genzyme

3 shot

1 shot

+--

++-

+++

--

-Prisoner’s Dilemma? • Dominant strategies?• Nash equilibrium?• Pareto inefficient?

11 Competitor Analysis

Genzyme v. J&J: Can they get the R&D “war” under control?

J&J (Orthovisc)3 Shot 1

shot

Genzyme

3 shot

1 shot N

+--

++-

+++

--

-Prisoner’s Dilemma? • Dominant strategies?• Nash equilibrium?• Pareto inefficient?

TwoOneYes

12 Competitor Analysis

Exercise: Knee-Jerk Reactions

How can we promote cooperation to preserve industry profitability?

Imagine a game between Genzyme and J&J to limit the “R&D war” (for the time being, ignoring other competitors)

Can they get control of R&D expenditures so they can realize a higher return?

20 Competitor Analysis

Repeated Prisoner’s Dilemma Games

Repeated games can lead to cooperation – even if they play “non-cooperatively.” Why? How?

What determines whether cooperation will emerge? Gains to defecting in the current round? Likelihood of retaliation in future rounds? Cost imposed by retaliation in future rounds? Relative value placed on future vs. present

payoffs?

Axelrod tested algorithms (2-player repeated games) Tit-for-tat worked best – cooperative in the 1st

round then repeat opponent’s prior move. Never instigate, always respond in kind, and always forgive.

22 Competitor Analysis

Exercise: Knee-Jerk Reactions II (4 Player

version)

How can we promote cooperation to preserve industry profitability?

How does the game change as more firms enter the industry?

23 Competitor Analysis

Behavioral Approach to Anticipating Rivals’ Responses

25 Competitor Analysis

Using Resources to Predict rivals’ actions: timing & magnitude

Motivation/Perceived

Threat

Rival’s Response

(e.g., lag, order,magnitude)

Awarenessof Rival

Ability toRespond

26 Competitor Analysis

ResourceSimilarity

Market Commonali

ty

Rival Cognition

Awareness & Motivation: How to stay under the radar…

Is firm in same

league?

Do the mkts overlap?

Is firm viewed as a

threat?

Motivation/Perceived

Threat

Rival’s Response

(e.g., lag, order,magnitude)

Awarenessof Rival

Ability toRespond

Resource Strength

30 Competitor Analysis

Competitor’s Cognition

Beliefs: How does the competitor view the industry (themselves and rivals)?

Intentions: What are the competitor’s goals & objectives?

Past Actions: To what extent is the rival bound or constrained by past actions?

Psst: “J&J anticoagulant may be approved.”Psst: “J&J acquires Micrus Endovascular.”Psst: “J&J heart failure study published”

Patents

Apps

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Key Points in Competitor Analysis

Estimate payoff structure. Assess payoffs to predict rival responses to proposed strategies.

Anticipate rivals’ perceptions. Market commonality, resource similarity & cognition indicate whether a move will elicit a response.

Collusion & prisoners’ dilemma. Sustaining cooperation requires an effective enforcement mechanism. Threat of retaliation depends on: Number of players Severity of retaliation Benefits of defecting Visibility of

defections Current v. future payoffs

32 Competitor Analysis

British Sky Broadcasting10/5/11

34 Competitor Analysis

Flying Fickle Finger of Fate Falls on Team 22

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Agenda

What is the strategic problem?

What is the extent of resources BSkyB would commit to improve the situation?

What is the range of possible solutions to consider?

Recommendations?

What did they do?

36 Competitor Analysis

Five Forces Analysis

RivalrySupplier Power

Entry Barriers

Substitute

Products

Buyer Power

37 Competitor Analysis

Factor Influencing Bargaining Power?

Entry barriers Substitutes Buyer power Supplier power Rivalry0%

10%

20%

30%

40%

50%

60%

12%

3%10%

57%

18%

38 Competitor Analysis

Supplier Poweris Highest When:

Buyer Power

Supplier Power

Entry Barriers

Substitute

Products

Rivalry

Buyer Power

Supplier Power

Suppliers are large and concentrated/little rivalry

Differentiated products increase switching costs between vendors and/or substitute products

Suppliers can forward integrate Focal industry represents a small % of

suppliers’ business

39 Competitor Analysis

Outlook for BSB?

Great! (Buy) Not Sure (Hold) Poor! (Sell)0%

5%

10%

15%

20%

25%

30%

35%

40%

45% 40%44%

16%

40 Competitor Analysis

Using Resources to Predict rivals’ actions: timing & magnitude

Motivation/Perceived

Threat

Rival’s Response

(e.g., lag, order,magnitude)

Awarenessof Rival

Ability toRespond

45 Competitor Analysis

Predicting the Unpredictable?

What are the sources of uncertainty?

How might these interact to form scenarios?

What are the trigger points to identify the scenarios?

How can you prepare for the scenarios?

46 Competitor Analysis

Bidding War for Broadcast Rights

ONdigitalNoBid Bid

BSBNoBi

d

BidN

+--

++-

+++

--

-

Prisoner’s Dilemma? • Dominant strategies?• Nash equilibrium?• Pareto inefficient?

TwoOneYes

47 Competitor Analysis

BSkyB Buys Manchester United for £623.4m

Getting a Leg Up on Football

48 Competitor Analysis

Payoffs with a BSB Toehold

ONdigitalNoBid

Bid

BSBNoBi

d

Bid

0

0

N-CRadv

V-.92CL

V-CL

.08CL-CRadv -CF-CRadv

V-.92CH

Where: • V=value of Manchester

United• CL/CH/CH=cost of

low/high/failed bid• CRadv=cost from rival’s

advantage

49 Competitor Analysis

What Happened? Manchester United accepted a

£623.4m bid from BSkyB (9/98). UK Monopolies and Mergers

Commission blocked the bid (4/99). “The toehold effect would have consequences

for any future collective sale of Premier League rights …If BSkyB acquired Manchester United, 5-8% of whatever it paid to obtain the Premier League rights would flow back to it.”

BSB acquired 9.9% stakes in 4 Premier League clubs (Manchester United, Leeds United, Sunderland, Manchester City).

50 Competitor Analysis

British Sky Take-Aways

Illustrates how industry structure (5 forces) can be used to frame strategic problems.

Opportunity to apply game theory to a strategic challenge and see how strategic moves can alter the payoff structure.

Explore creativity and strategic strategy formulation.

51 Competitor Analysis

Aldi Invades Badger Territory

Field trip! Visit 1 of the 3 Madison Aldi stores & identify a the best bargain for $10 or less.

Analysis. What could your client do to lower their cost structure? What policies couldn’t be copied?

Aldi Poll (Still only need to do 8 but it is 8 of 12)

Teams 1-3/12-14: Copp’s, Metcalfe’s, or Hy-Vee Teams 4-5/15-16: Wal-Mart, Sam’s Club,

Costco, Woodman’s Teams 6-7/17-18: Cub Foods or Pick-N-Save Team 8-9/19-20: Whole Foods, Trader Joe’s,

Fresh Madison Mkt, or Willy St. Coop Team 10-11/21-22: PDQ, Stop-N-Go, Stop-N-

Shop, Quick Mart