Competitor Analysis Final
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Transcript of Competitor Analysis Final
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8/8/2019 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)
Assumptions(About itself and Industry)
What the competitoris currently doing
Current Strategy(Business is currently competing)
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