Global Business 2e Chapter 11 Managing Global Competitive Dynamics

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.

GLOBAL COMPETIVE DYNAMICS

Competitive dynamics
Actions and responses undertaken by competing firms.

Competitor analysis
Process of anticipating rivals actions in order to both revise a firms 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.
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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 prisoners dilemma.
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COMPETITION, COOPERATION, AND COLLUSION

Prisoners dilemma Game 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

Prisoners 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). there industry characteristics that make collusion MORE LIKELY or LESS LIKELY? so, what are those characteristics?

Are

If
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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.
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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 firms 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 Antitrust

Competition 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 proincumbent and pro-producer.  In contrast, US competition policy is procompetition 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.
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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 Influencing Competitive 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 dont 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 VERSUS MULTINATIONAL 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).
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LOCAL FIRMS VERSUS MULTINATIONAL ENTERPRISES

Dodger Cant 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 Policy
Debate is that anticompetitive actions (defeating competition) are what competition is all about. Todays environment is different from when antitrust laws were made (1890 for the Sherman Act). A large firm in one country (e.g., Boeing) isnt a monopoly because of foreign rivals (e.g., Airbus).
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MANAGEMENT SAVVY



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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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