Business Policy: Competitive Rivalry, Diversification, and Mergers

What is competitive rivalry?

The ongoing set of competitive actions and responses occurring between competing firms for an advantageous market position.

How does competitive rivalry affect business strategies?

It affects all types of strategies and has a dominant influence on the firm's business-level strategy.

What is the impact of intensified rivalry within an industry?

It results in lower average profitability.

What are the signs of mutual interdependence among firms?

A firm's competitive actions have noticeable effects on its competitors, eliciting competitive responses.

What is competitor analysis?

A process used to help a firm understand its competitors by studying their objectives, strategies, assumptions, and capabilities.

What dimensions does a firm assess its competitors on?

Market commonality and resource similarity.

What does market commonality refer to?

The number of markets in which a firm and a competitor are jointly involved and the importance of those markets to each competitor.

What is multimarket competition?

When firms compete against one another in several markets.

How does resource similarity affect competition?

It is the extent to which a firm's resources are comparable to a competitor's, influencing strengths, weaknesses, and strategies.

What is the role of awareness in competitive behavior?

It is the extent to which competitors recognize their mutual interdependence due to market commonality and resource similarity.

What factors influence a firm's motivation to respond to competitors?

The firm's incentive to take action relates to perceived gains and losses.

What does the ability of a firm refer to in competitive behavior?

Each firm's resources and the flexibility those resources provide to attack or respond to competitors.

What is a competitive action?

A strategic or tactical action taken by a firm to build or defend its competitive advantages.

What distinguishes a strategic action from a tactical action?

Strategic actions involve significant resource commitment and are difficult to reverse, while tactical actions are easier to implement and reverse.

What are first mover incentives?

The advantages gained by first movers through product innovation, aggressive advertising, and advanced research.

What is the role of second movers in competitive actions?

They respond to first movers by studying customer reactions and avoiding mistakes made by the first mover.

What challenges do late movers face in competitive actions?

They respond after considerable time, leading to slower success and average returns.

How do small firms differ in competitive actions compared to large firms?

Small firms are quicker to launch competitive actions and are perceived as nimble and flexible.

What factors contribute to the likelihood of a firm initiating an attack?

Market commonality, resource similarity, awareness, motivation, ability, first mover incentives, organizational size, and quality.

What dimensions define product quality?

Performance, features, flexibility, durability, conformance, serviceability, aesthetics, and perceived quality.

What dimensions define service quality?

Timeliness, courtesy, consistency, convenience, completeness, and accuracy.

What factors affect the likelihood of a firm responding to a competitor's action?

The type of competitive action, the actor's reputation, and the impact on the firm's market position.

What is the significance of resource imbalance in competitive responses?

The greater the resource imbalance, the greater the delay in response by the firm with a resource disadvantage.

What is the expected outcome when firms face competitors with greater resources?

Firms should eventually respond, regardless of the challenges posed by the competitor.

What are strategic actions?

Actions taken by a firm that elicit fewer total competitive responses due to the time needed for implementation and assessment.

Give an example of a strategic action.

Walmart's entry into the European market.

What are tactical responses?

Quick actions taken to counter the effects of tactical actions by competitors.

Provide an example of a tactical response.

Fare reduction by an airline.

What is an actor in competitive dynamics?

The firm taking an action or response.

How does reputation affect competitive responses?

Firms with a history of success elicit quick reactions and imitation; complex actions receive less response.

Define market dependence.

The extent to which a firm's revenues or profits are derived from a particular market.

How do competitors with high market dependence respond to threats?

They are likely to respond strongly to attacks threatening their market position.

What is competitive dynamics?

Ongoing actions and responses between all firms competing within a market for advantageous positions.

What are slow-cycle markets?

Markets where competitive advantages are shielded from imitation for long periods and imitation is costly.

What characterizes fast-cycle markets?

Competitive advantages are not shielded from imitation, and imitation happens rapidly and inexpensively.

What are standard-cycle markets?

Markets where moderate costs of imitation may shield competitive advantages, making them partially sustainable.

What is a freemium business model?

A model where a firm provides a basic product for free and earns revenue by selling a premium version.

Give an example of a freemium model.

Dropbox and Adobe PDF Reader.

What is an advertising business model?

A model where a firm provides advertisers with access to target customers for a fee.

What is a peer-to-peer business model?

A model that matches those wanting a service with those providing that service.

What is a franchise business model?

A model where a firm licenses its trademark and processes to franchisees.

What is a subscription business model?

A model where a firm offers a product to customers on a regular basis.

Give an example of a subscription model.

Blue Apron and Netflix.

What is a digital platform business model?

An Internet-based business that facilitates exchanges of information, goods, or services.

What distinguishes business-level strategy from corporate-level strategy?

Business-level strategy focuses on competing in a single industry, while corporate-level strategy involves managing a group of different businesses.

What are the two factors that differentiate diversified firms?

The level of diversification and the type of businesses involved.

What is a single business in terms of diversification?

A firm where 95% or more of revenue comes from a single business.

What is a dominant business?

A firm where 70% to 95% of revenue comes from a single business.

Provide an example of a dominant business.

UPS, which generates 60% of its revenue from US package delivery.

What characterizes related diversified firms?

They earn more than 30% of revenues from sources outside the dominant business and have related business units.

What is related constrained diversification?

Less than 70% of revenue comes from the dominant business, and all businesses share product, technological, and distribution linkages.

Give an example of related constrained diversification.

Procter & Gamble (P&G) and Merck.

What defines unrelated diversification?

Less than 70% of revenue comes from the dominant business, with no common links between businesses.

What are conglomerates?

Firms that practice unrelated diversification.

What is the main reason firms diversify?

To increase strategic competitiveness and enhance the firm's value.

What is value-creating diversification?

Diversification that builds upon or extends a firm's resources, capabilities, and core competencies.

What are economies of scope?

Cost savings that occur when a firm shares activities or transfers capabilities between its businesses.

What is operational relatedness?

Value created by sharing primary or support activities between business units.

What is corporate relatedness?

Using complex resources and capabilities to link different businesses through managerial and technological knowledge.

How does corporate relatedness create value?

By eliminating resource duplication and providing intangible resources that are hard for competitors to imitate.

What is market power in the context of diversification?

The ability of a firm to sell products above competitive levels or reduce costs below competitive levels.

What is vertical integration?

A strategy where a firm controls its own supply chain, either through backward or forward integration.

What are financial economies?

Cost savings realized through better allocation of financial resources.

What is efficient internal capital market allocation?

The corporate office distributes capital to business divisions based on better access to performance information.

What is the risk associated with activity sharing in diversification?

It requires sharing strategic control over business units, which can increase costs.

What is the significance of simultaneous sharing and transferring in diversification?

It involves managing operational and corporate relatedness to create economies of scope and transfer core competencies.

Provide an example of a company that practices simultaneous sharing and transferring.

The Walt Disney Company.

What is the potential issue with diversification efforts?

Many efforts fail due to implementation difficulties.

What is the difference between related linked and related constrained diversification?

Related linked has limited links between businesses, while related constrained shares significant operational linkages.

What is an example of a firm practicing unrelated diversification?

Samsung or United Technologies (RTX Corporation).

What is the primary purpose of restructuring in firms?

To create financial economies by buying and selling assets in the external market.

What are the two focuses for successful resource allocation decisions?

Mature, low-technology businesses and businesses not reliant on a client orientation.

What was the impact of antitrust laws in the 1960s and 1970s on mergers?

They discouraged mergers that increased market power, leading to unrelated mergers.

What change occurred in antitrust enforcement in the 1980s?

There was a relaxation of enforcement, resulting in more and larger horizontal mergers.

What is a potential reason for firms to diversify?

To prevent the value of the firm from decreasing.

How do high tax rates on dividends influence corporate behavior?

They cause a shift from dividends to buying and building companies in high-performance industries.

What significant change did the 1986 Tax Reform Act implement?

It reduced the individual ordinary income tax rate and treated capital gains as ordinary income.

What role does low performance play in diversification?

It acts as an incentive for diversification, as high performance reduces the need for it.

Under what conditions might diversification be considered a defensive strategy?

When a product line matures, is threatened, or when a firm is small in a mature industry.

What is synergy in the context of business diversification?

It exists when the value created by businesses working together exceeds the value created independently.

What risk does synergy introduce to business units?

It creates joint interdependence, increasing the risk of failure.

What are some managerial motives for diversification?

Managerial risk reduction, desire for increased compensation, and building personal performance reputation.

What governance structures can control managerial tendencies to diversify?

The firm's board of directors, performance monitoring, and executive compensation limits.

How does uncertain future cash flow influence diversification decisions?

It may lead firms to diversify as a defensive strategy.

What is the relationship between diversification and risk in low-performing firms?

Low-performing firms often take higher risks, leading to diversification.

What is the effect of a firm becoming risk-averse in terms of diversification?

It may constrain its level of activity sharing and reduce technological change.

What is the significance of performance monitoring in corporate governance?

It helps control managerial tendencies to diversify excessively.

What is a key factor that can affect diversification decisions?

Both external and internal environments.

What does the term 'value-reducing diversification' refer to?

Diversification driven by managerial motives rather than firm value enhancement.

What can inadequate internal firm governance lead to?

Diversification that fails to earn even average returns and the threat of hostile takeover.

What two elements must a firm have to successfully diversify?

Incentives to diversify and the resources required to create value through diversification.

What determines value creation in diversification?

Appropriate use of resources rather than just incentives to diversify.

What is a merger?

A strategy where two firms of roughly the same size agree to integrate their operations on a co-equal basis.

What characterizes an acquisition?

One firm buys a controlling interest in another firm, making it a subsidiary within its portfolio.

What is a takeover?

An unfriendly acquisition where the target firm did not solicit the acquiring firm's bid.

What is a primary reason for acquisitions?

To gain market power.

How does market power increase?

By selling goods or services above competitive levels and having lower costs than competitors.

What are horizontal acquisitions?

Acquisitions of firms in the same industry, increasing market power through cost and revenue-based synergies.

What are vertical acquisitions?

Acquisitions of suppliers or distributors, increasing market power by controlling parts of the value chain.

What are related acquisitions?

Acquisitions of firms in highly related industries, often difficult to implement due to synergy challenges.