Summary:

The analysis in this chapter has provided a dynamic dimension to Chapter 3's discussion of competitive advantage and added value by discussing ways of anticipating how the interactions of interdependent players will unfold over time. One broad approach is best suited to situations in which there is a small number of identifiable players. In such situations, game theory can help predict players' actions on the basis of their economic incentives, and behavioral theory on the basis of their organizational predispositions. Game theory and behavioral theory are, in this respect, clearly complementary. A second broad approach is better suited to situations in which players are more numerous or faceless. In such situations, four evolutionary dynamics that threaten the sustainability of actual or targeted advantages should be considered. Two dynamics-imitation and substitution-threaten businesses' added value and two others-holdup and slack-threaten their owners' ability to appropriate that added value for themselves. These evolutionary dynamics are, of course, only general tendencies, not absolute economic laws. Some firms manage to achieve sustainability for significant periods of time despite all of the threats that they face. Still, given the evidence on general unsustainability, understanding these threats should help managers actively anticipate and prepare for changes in the landscapes on which they operate.

A third contribution of this chapter has been to discuss not only threats to sustainability, but also ways of countering those threats (see Exhibit 4.9). Understanding the full range of possible responses increases the likelihood that managers will, in fact, be able to respond successfully to the threats that they face. Having said that, however, it must be granted that the discussion in this chapter has focused on the threats one-by-one. In the next chapter, we look at overarching implications of the threats to value-static and dynamic-that we have identified for strategies that aim to build and sustain superior performance. Two different theories of competitor analysis: Game Theory Behavioral Theory Game Theory Most helpful when there are a small # of players whose actions/reactions matter for a particular issue Non Zero Sum (ie ones loss isnt directly some one elses gain) Forces Managers to view items Freewheeling Games No deal goes undone, no structure to deal making Rule Based Games Specific rules of engagement and deal making o Used by companies for decision making around: Marketing Variables Capacity expansion/ reduction Entry / entry deterrence Acquisitions Bidding Negotiation Example Analysis: Company C is threatened by Company E introduction a more effective but cheaper alternative 1. Specify options for levels of Es pricing a. Identify Cs response price 2. Experts gauge market share 3. Combine Market shares with C cost knowledge and Es estimate (using NPV) 4. Input into Matrix

The first entry in each cell gives the estimated payoff for C and the second entry (following the slash) estimates the payoff for E. Using the above chart C identified that it needed E to enter the market with a low/moderate price. To do that they needed to neutralize Es price advantage. Order of players acting, and also focusing on ones actions to evoke re-actions is the goal of the game theory. Identifiable players, with quantifiable statistics are key. Also like players can be aggregated into one larger group. Common simplifications include reducing the number of players under consideration, fixing the values of particular parameters so as to simplify their effects, suppressing uncertainties, and collapsing the timing structure of. Competitors may not always act as reasoned, and may be shortsighted, example is if E above had focused purely on cash flows and not on NPV. The behavioral approach to analyzing competitive interactions is important to this will assist in resolving issues. 419 Behavioral Sunk cost fallacy causes irrational escalation in interactions between two players. This is due to the use of it to justify past choices, selective perception, hostility, and various other business distortions. According to Porter, below his first two are less likely to be given their due than the second. 60 factors influence the 4 items in the framework and at least 20 sources of data and 20 options for compiling data are required. p80 bottom Gaps: Checklists miss influences ex: History drives an organizations behavior, irrational escalation in competitive interactions, the people that it employs, p81 top

This is Porters diagram Behavioral analysis tends to focus on organizational predispositions, while game theory focuses on the economic incentives facing organizations Managers should keep both economic and noneconomic influences on competitors' behavior in view Game Theory and Behavioral Analysis limitations: p81 bottom Large amounts of data required to be effective Loss of power when competitors are faceless Unwieldy when accounting for more than a few players Evolutionary Dynamics p 82 top Threats to sustainability:

p. 83 Major Threats: Imitation and Substitution Threaten businesses added value Holdup and Slack - Threaten owners ability to appropriate added value for themselves. Imitation: p84 Not always bad, in example of loyalty programs etc it is fine. It can hurt when a unique business model is copied and therefore makes it generic.

Barriers to Imitation: 86 Scale of Scope Economies p 86 bottom Learning / Private Information p87 top Contracts and Relationships p87 mid Network externalities 87 mid Threats of Retaliation Time Lags p89 top Strategic Complexity 89 mid Upgrading 89 bottom Substitution Not responding p93 bottom Fighting 94 top Switching 94 mid Recombining 94 mid Straddling 94 bottom Harvesting 95 top

Threats to the appropriability of added value p95 top Hold-up holdup is a systematic threat to the appropriability of added
value that is largely based on cospecialization They have bargaining leverage because they have something you need and cant get elsewhere (added value) Ex: Auto manufactures Hold-up is especially threatening when parties in a relationship have invested in assets that are specific to that relationship (so its hard to walk away)
holdup is a systematic threat to the appropriability of added value that is largely based on cospecialization.A range of options exist for dealing with holdup threats; these approaches vary, among other ways, in terms of the extent to which they emphasize competition as opposed to cooperation. A historical bias in strategic thinking toward taking the competitive approach (i.e., maxi-mizing bargaining power in situations where holdup is an issue) should be balanced with the recognition of opportunities for cooperation (i.e., the possibility of growing the pie so as to make each participant in the transaction/relationship better off). P 100 bottom

Contracting p97 bottom o Used to avoid being held up Integrating p 98 mid o Purchase of partners/sourcing creating vertical integration Interorganizational relationships may sometimes offer a better basis for dealing with holdup-related issues than either market transactions or the managerial hierarchies induced by integration, as discussed below. Methods to minimize dependency: o Building ones Bargaining power p 98 bottom o Bargaining Hard P99 top o Reducing Asset-Specificity p 99 mid Building Relationships p 99 bottom o Each side of a partnership puts substantial investment into a relationship (suppliers develop the parts, consumers dont try and reverse engineer them) Developing Trust P 100 top o Finally,note that the broader context in which a business operates can create another, very different type of holdup threat, one involving unilateral expropriation (i.e.,effective revocation of property rights) rather than mutual cospecialization Slack Slack can be defined as the extent to which the value appropriated by an organization falls short of the amount potentially available to them p 101 Slack, or waste within the firm, dissipates value

 Slack is hard to identify Plush carpets for their own sake are slack But plush carpets to win customers and recruit talent might be wise investments slack is thought to be large 10-40% of revenues p101 mid Slack tends to be worst under certain conditions Forgiving competitive environments Settings in which managers must have wide discretion over productive processes Responses to Slack p103 mid through 104 Gathering information Monitoring behavior Offering performance incentives Shaping norms Bonding resources Changing governance Mobilizing for change