Competitive Strategy and Industrial
Structure
Course Review
Professor Yuval Salant

Main topics


Investigating the connection between industry fundamentals and competitive strategy
 Strategy success depends on industry fundamentals



Strategic management of competition
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



The tradeoff between flexibility and commitment
Direct vs. strategic effects

Incumbent weaknesses and entry to markets

1

Strategy is not a sequence of isolated decisions •
•
•
•

Strategy as a process
Stage 1: Structure
“Understanding the game”

Demand analysis (location model)
Cost analysis (economies of scale)
Risk factors
Key cognitive biases

Threats & Opportunities

Product positioning, Differentiation,
Competitive convergence, proliferation & preemption, Consolidation, Signaling and punishment, Price protection policies,
Winner-Take-All competition ,Judo strategies, Couponing, Loyalty Programs,
Pricing with Adverse Selection

Stage 2: Strategy selection
“Playing the game”
Propose plausible strategic alternatives

Stage 3:
Evaluation & Implementation

Evaluate and revise your strategy;
Implement, react and adapt

Industrial structure: Demand analysis meets cost analysis Economies of scale

Taste for variety Weak

Strong

Perfect Competition

Homogenous Product
Oligopoly

Strong

Monopolistic Competition

Differentiated Product
Oligopoly

More products

Weak

Fewer firms

2

Competitive Strategy:
Playing the Game

Stages 2 & 3:

Demand Analysis meets Cost Analysis

Strong taste for variety plus strong economies of scale
Likely industrial structure: Multi-product, concentrated, profitable oligopoly
 Product proliferate to serve diverse consumer tastes and to Pre-empt entry
(RTEC)
 Segment market with different firms located in different niches (Gillette vs.
Bic, GE-W)
 Consolidate a fragmented industry (Video stores, funeral homes)
Strong taste for variety plus weak economies of scale
Likely industrial structure is monopolistic competition with little scope for competitive strategy (car retailing)



Competitive Strategy:
Playing the Game

Stages 2 & 3:

Demand Analysis meets Cost Analysis

Weak taste for variety plus strong economies of scale
 No network effects: homogenous product oligopoly – price management is critical (Airlines)
 Network effects: Winner-take-all markets
 Preemption, commitment, licensing
Weak taste for variety plus weak barriers to entry
 Perfect competition with little scope for competitive strategy
 Possible sources of long-run profit:



Adverse selection – when price cutting selects “bad” customers prices may remain high (credit cards, car insurance)
Competitive advantage that is hard to imitate (southwest, capital one)

3

Strategic management of price competition


Managing short-term price competition is key to profitability



Suffer short-term “pain” (i.e. forego immediate profit) for long-term “gain”
(i.e. cooperative pricing in future)



Success often depends on structural issues

Stage 1: Risk Factor Analysis
Structural factors

Market performance

Root causes

Observable symptoms

Weak Entry Barriers

Competitive Strategy:
Understanding the Game

Excess entry

Fragmented industry
Rogue / marginal players

Strong incentives for price cutting Predatory behavior

Durable Capacity
Feast / famine cycles
Frequent Capacity Misalignment

Volatile demand
Lumpy orders
Non-transparent
pricing

Ineffective signaling punishment strategies

Poor profitability 4

Managing price competition: Airlines
Stage 1: Structure
Weak taste for variety, durable capacity, volatile demand, weak entry barriers, marginal players

Stages 2+3: Strategy Selection and evaluation
Competitive Price Discrimination
Leads to targeted discounts to win share, triggers price wars, and hence is unsuccessful
 Successful strategy must deal with short-term incentives
 Value Pricing simplifies pricing structure to
(1) improve signaling and monitoring and
(2) reduce temptation to cut prices but cannot deal with marginal players
