the profit-maximizing response to a
Firm 1’s soft commitment has a positive
competitor’s price cut.
effect and Firm 1’s tough commitment has a
Strategic Complements and Substitutes
negative effect.
When actions are strategic complements,
As long as the beneficial strategic effect
one firm’s aggressive behavior leads its
could outweigh the negative direct effect,
competitors to behave more aggressively as
the soft commitment may be valuable even
well.
though its direct effect is unfavorable.
When actions are strategic substitutes, one
Two Dimensions in the Two-stage Commitment Models
firm’s aggressive behavior leads its
Whether commitments are tough or soft,
competitors to behave less aggressively.
Whether the stage 2 tactical variables are
Strategic Incentives to Make Commitments
strategic substitutes or strategic
Commitments have both a direct and a
complements.
strategic effect on a firm’s profitability.
If the stage 2 tactical variables are strategic
Tough versus Soft Commitments
substitutes (Cournot competition and the
Firm’s tough commitment is bad for its
reaction curves slope downward), a tough
competitors, whereas a soft commitment is
commitment has a beneficial strategic effect.
good for its competitors.
A soft commitment has a negative strategic
In Cournot competition
effect.
A firm making a tough commitment is
If the stage 2 tactical variables are strategic
certain to produce more output than it would
complements (Bertrand competition and the
have done without the commitment.
reaction curves slope upward), a soft
A firm making a soft commitment is certain
commitment has a beneficial strategic effect.
to produce less output than it would have
A tough commitment has a harmful strategic
done without the commitment.
effect.
In Bertrand competition
Two Important Implications for Strategic
A firm making a tough commitment is
Commitment
certain to set lower price than it would have
When making hard-to-reverse investment
done without the commitment.
decisions, managers ought to anticipate how
A firm making a soft commitment is certain
the decisions will affect the evolution of
to set higher price than it would have done
market competition in the future.
without the commitment.
The details of market rivalry can profoundly
A commitment by one firm will not generate the
Firm 1 is contemplating making a strategic commitment.
influence the willingness of firms to make
desired response from its competitors unless it has three
Stage 1: Firm 1 decides whether to make a
commitments.
characteristics:
commitment
The Effect of Strategic Commitment
It must be visible
Stage 2: Firm 1 and Firm 2 compete with each
Sometimes the effect of the strategic
It must be understandable
other ( quantity competition or price competition)
commitment on a competitor may depend on
It must be credible
whether the competitor is an existing
Stage 2 Competition Is Cournot
Credibility
If Firm 1 makes a tough commitment, then
competitor (in the market) or a potential
Contracts can also facilitate commitment.
its reaction function will shift to the right.
competitor (outside the market).
Sometimes, even public statements of
An aggressive move may result in an
intentions to act can have commitment value.
aggressive response by an existing
R1 (before)
Q2
The credibility of public announcements is
competitor, but a passive response by a
Firm 1’s
R1 (after)
enhanced when it is clear that the reputation
potential competitor.
output rises；
of the firm will suffer if the firm fails to do
The strategic effect of the commitment may
what it has said it will do.
depend on capacity utilization rates in the industry.
Firm 2’s
Strategic Commitment and Competition
When capacity utilization rate is high, an
output falls.
Strategic complements and strategic
aggressive commitment may result in a
Q1
substitutes are concepts that capture how
passive response by the rivals.
competitors react when one competitor
If Firm 1 makes a soft commitment, then its
When capacity utilization rate is low, an
changes a tactical variable such as price or
reaction function will shift to the left.
aggressive commitment may result in an
quantity.
aggressive response by the rivals.
R1 (after)
Q2
Tough commitments and soft commitments
The strategic effect of the commitment may
Firm 1’s
are concepts that capture whether a
depend on the degree of horizontal differentiation
R1 (before)
output falls；
commitment by one firm places its rivals at
among the firm making the commitment and its
Firm 2’s
a disadvantage.
competitors.
Strategic Substitutes
When the products are highly differentiated,
output rises.
When reaction functions are downward
the strategic effect of the commitment is
Q1
sloping, the firm’s actions are strategic
small.
substitutes.
Firm 1’s tough commitment has positive
When the products are less differentiated,
q1
strategic effect. Firm 1’s soft commitment
the strategic effect of the commitment is
has a negative strategic effect.
large.
As long as the beneficial strategic effect
Flexibility and Option Value
could outweigh the negative direct effect,
The positive strategic effects of a
the tough commitment may be valuable even
commitment are usually rooted in
q2
When actions are strategic substitutes, the
though its direct effect is unfavorable.
inflexibility.
more of the action one firm takes, the less of Stage 2 Competition is Bertrand
However, strategic commitments are almost
the action the other firm optimally chooses.
If Firm 1 makes a tough commitment, then
always made under conditions of uncertainty
In the Cournot model, quantities are
its reaction function will shift to the left.
about market conditions, costs, or
strategic substitutes because a quantity
competitors’ goals and resources.
R1(after)
P2
R1(before)
increase is the profit-maximizing response
Flexibility gives the firm options.
Firm 1’s
to a competitor’s quantity reduction.
The value of options may occur when the
Strategic Complements
firm can delay a commitment and await new
price falls；
When reaction functions are upward sloping,
information about its possible effects.
Firm 2’s
the firm’s actions are strategic complements.
The option value of delay is the difference
price falls
between the expected net present value if the
p1
P1
If Firm 1 makes a soft commitment, then its
firm makes a commitment today and the
reaction function will shift to the right.
expected net present value if the firm waits
until uncertainty resolves itself.
R1(before)
P2
R1(after)
The option value arises when the firm leaves
Firm 1’s
p2
When actions are
strategic complements, the
itself with options that allow it to tailor its
price rises；
more of the action one firm chooses, the
decision making to the underlying
Firm 2’s
more of the action the other firm will also
circumstances it faces.
price rises
optimally choose.
A Framework for Analyzing Commitments
P1
In the Bertrand model, prices are strategic
Major strategic decisions usually involve
complements because a reduction in price is
investment in sticky factors: physical assets,
resources, and capacities that are durable,
CHAPTER 7
Strategic Commitment
Strategic commitments are decisions that have
long-term impacts and are difficult to reverse.
Whether to invest in new capacity or introduce
new products are examples of strategic
commitments.
When these commitments are effective, they can
often shape competitors’ expectations and change
their behavior in ways that benefit the firm
making the commitment.
Strategic commitments are hard to reverse, they
are inherently risky.
Tactical Decisions
Strategic commitments should be distinguished
from tactical decisions, decisions that are easily
reversed and whose impact persists only in the
short run.
The pricing and production decisions are
examples of tactical decisions.
Tactical decisions can be adapted to what-ever
situation the firm currently faces.
Aggressive
Passive
Aggressive
12.5, 4.5
16.5, 5
passive
15, 6.5
18, 6
The Nash equilibrium is that Firm 1 chooses Passive
and Firm 2 choose Aggressive
Strategic commitments that seemingly limit options can
actually make a firm better off.
specialized to the particular strategy that the
firm follows, and untradeable.
Commitment-intensive decisions are fraught
with risk and require that managers look for
into the future to evaluate alternative
strategic actions.
A Framework for Analyzing Commitments
four-step framework for analyzing commitmentintensive choices
Positioning analysis
Sustainability analysis
Flexibility analysis
Judgment analysis
Positioning Analysis
It is to determine the direct effect of the
commitment.
It involves analyzing whether the firm’s
commitment is likely to result in a beneficial
position in the market.
Sustainability Analysis
It is to determine the strategic effects of the
commitment.
It involves analyzing potential responses to
the commitment by competitors and
potential entrants in light of the
commitments that they have made and the
impact of those responses on competition.
Flexibility Analysis
Flexibility analysis incorporates uncertainty
into positioning and sustainability analysis.
Flexibility gives firms option value.
The key determinant of option value is the
learn-to-burn ratio.
It is the ratio of the learn rate and the burn
rate.
The Learn-to-Burn Ratio
The learn rate is the rate at which the firm
receives new information that allows it to
adjust its strategic choices.
The burn rate is the rate at which the firm
invests in the sunk assets to support the
strategy.
A high learn-to-burn ratio implies that a
strategic choice has a high degree of
flexibility.
A high learn-to-burn ratio implies that the
option value of delay is low because the firm
can quickly accumulate information about
the prospects of its strategic choice before it
is too heavily committed.
Experiments and pilot programs are ways
for firms to increase its learn-to-burn ratio
and increase its flexibility in making
commitment-intensive choices.
Judgment Analysis
Firms should take stock of the
organizational and managerial factors that
might distort the firm’s incentive to choose
an optimal strategy.
Part of the process of making commitmentintensive decisions is a choice of how to
make such decisions.
Two Types of Errors in Making Commitment-Intensive
Choices
Type I errors: rejecting an investment that
should have been made.
Type II errors: accepting an investment that
should not have been made.
Decentralized decision making results in a
relatively higher incidence of type II errors.
Hierarchical decision making results in a
relatively higher incidence of type I errors.
CHAPTER 8 - THE DINAMICS OF PRICING
REVALRY
DYNAMIC PRICING RIVALRY
Firms that compete with one another do so
repeatedly, again and again.
Competitive moves by firm might have short-run
benefit, but in the longer run
can hurt the firm if the competitor makes
countermoves.
Why the Cournot and Bertrand Models Are
Not Dynamic
Cournot & Bertrand models are static, they are looking
at simultaneously moves.
In these models, all firms simultaneously make onceand-for all quantity or price choices. The reaction
functions are not time based and only
consider one period of time.
These models reduce a complicated phenomenon in
industry rivalry.
q2
F ig ure 1: Conve rg e nce to a
Cournot E quilibrium
Cournot e quilibrium
q2 1
q2 2
q2 *
R2
R1
0
q1
1
2 *
q1 q1 q1
q1
Dynamic Pricing Rivalry: Intuition
Intense price competition, profits can be driven to zero.
The firms would prefer prices to be closer to their
monopoly price level.
 It can be achieved if there is a “cooperative
pricing” in which neither
firms will undercut its rival.
A firm that contemplates undercutting its rivals
confronts a tradeoff.
 In short time, it will increase a market share and the
firm has higher profit
 But, if rivals also respond to lowering their own
prices there will be no
more increase in market share, and on the other hand
will result lower price-cost margin.
Competitor Responses and Tit-for-Tat Pricing
tit-for-tat strategy says that the firm should try a
cooperative pricing
strategy in the current round, then match the opponents
response in the
preceding round.
Example:
 Shell vs. Exxon Mobil
 The current oil price $40 per hundred
pounds.
 Monopoly price is $60 and Bertrand
(oligopoly) price is $20
 Shell increases their price from $40 (current
price) to $60 (monopoly price):

If Exxon Mobil does not follow to increase
price, Shell will drop their
price back down after 1 week. Exxon Mobil will get
“bump” profit in
a week from $0.1154 million to $0.2307 million and
will be
back to $0.1154 million if Shell drop their price
down back to $40.
Exxon Mobil discounted present value weekly profit
would be $57.93 million.

If Exxon Mobil follows to increase price,
both firms will earn annual
profit $8 million or weekly profit $0.1538 million.
The discounted value of Exxon Mobil weekly profit
would be $77.05 million.
 Tit-for-Tat Pricing with Many Firms
The firm will get larger profit if it sticks on prevailing
price (P0) and all competitors use monopoly price
(PM). The firm undercutting its competitors and
capturing the entire market.
A firm’s one period profit gain from refusing to
cooperate with industrywide move to monopoly
prices is π0 – (1/N) πM
If each firm believe that competitor will raise the price
from P0 to PM in the current period and thereafter
will follow tit-for-tat strategy, then each firm will
find it in its self-interest to charge the monopoly
price as long as:
1/N(πM – π0)
----------------- > i
π0 – (1/N) πM
Where:
π0
: per period industry’s profit at the
prevailing price P0
πM
: per period industry’s profit when all firms
charge the monopoly
price PM
i : discount rate per period
The “Folk Theorem”
The “Folk Theorem” says that for sufficiently low
discount rates, any price between monopoly price
and marginal cost can be sustained as an equilibrium
in the infinitely repeated prisoners’ dilemma game.

Implies that cooperative pricing behaviour
is a possible outcome in an
oligopolistic industry even if all firms act unilaterally.
 Coordination
To attain the cooperative outcome, firms in the industry
must coordinate on a strategy, such as tit-for-tat, that
makes it in each firm’s self-interest to refrain from
aggressive price cutting.
The coordination problem can be overcome if there
exists a focal point strategy.

A focal point strategy is a strategy that is
so compelling that a firm
expects all other firms to adopt it.
 Why Is Tit-for-Tat So Compelling?
Another strategy results in the monopoly price for
sufficiently low discount rates is the “grim trigger”
strategy:

Starting this period, we will charge the
monopoly price (PM). In each
subsequent period, if any firm deviates from PM we
will drop our price
to marginal cost in the next period and keep it there
forever.

The threat of an infinite price war to keep
firms from undercutting their
competitor’s price.
Tit-for-tat strategy is simple and easy to describe and
easy to understand.
Tit-for-tat does well against many strategies in the longrun.
The tit-for-tat strategy embodies the following
properties:

Niceness : it is never the first to defect
from the cooperative outcome.

Provocability : it immediately punishes a
rival that defects from the
cooperative outcome by matching the rival’s
defection in the next
period.

Forgiveness : the rival returns to the
cooperative strategy.
Misreads
It is possible that a firm can misread a signal in the
market when cooperation is occurring.
 A firm mistakenly believes a competitor is charging
one price when it is
really charging another
 A firm misunderstands the reasons for a
competitor’s pricing decision.
A single misread leads to a pattern in which firms
alternate between cooperative and uncooperative
moves. If another move is misread as uncooperative
one, the result pattern become even worse.
Firm should carefully ascertain the details of the
competitive initiative and figure out the competitor’s
move before responding.
HOW MARKET STRUCTURE AFFECTS THE
SUSTAINABILITY OF
COOPERATIVE PRICING
Pricing cooperation is harder to achieve under some
market structures.
The following market structural issues may complicate
the attainment of cooperative pricing:
o
Market concentration
o
Structural conditions that affect reaction
speeds and detection lags
o
Asymmetries among firm
o
Price sensitivity of buyers
Market Concentration and Sustainability of
Cooperative Pricing
The benefit-cost ratio goes up as the number of firms
goes down.
Cooperative pricing is more likely to be achieved in
concentrated market (few firms) than in a
fragmented market (many firms), because:

There is less to gain from cheating due to
each firm already having a considerable
share of the market.

It is more likely that a few firms can more
quickly discover a focal point strategy.
 Reaction Speed, Detection Lags, and the
Sustainability of Cooperative Pricing
The speed with which firms can react to their rivals’
pricing moves also affects the sustainability of
cooperative pricing.
A firm maybe unable to react quickly to its
competitors’ pricing move, because:

Lags in detecting competitors’ prices.

Infrequent interactions with competitors
(e.g., a few times a year)

Ambiguities in identifying which firm
among a group of firms in a market is
cutting price

Difficulties distinguishing drops in volume
due to price cutting by rivals from drops in
volume due to unanticipated decreases in
market demand.
The above factors reduce the speed with which firms
can respond to defections from cooperative pricing.
Several structural conditions affect the importance of
these factors:
a.
Lumpiness of orders
b.
Information about sales transactions
c.
The numbers of buyers
d.
Volatility of demand and cost conditions
Lumpiness of Orders
This occurs relatively infrequently in large batches as
opposed to being smoothly distributed over the years.
Lumpy orders reduce the frequency of competitive
interactions between firms.
This makes price a more attractive competitive weapon
for individual firms and intensifies price competition
throughout the industry.
Information about the Sales Transaction
This is related to the visibility and complexity of the
sales transaction in the market.
When sales transactions are “public”, deviations from
cooperative pricing are easier to detect than when
prices are secret.
Deviations from cooperative pricing are also difficult to
detect when product attributes are customized to
individual buyers.
With secret and complex sales terms, forgiving strategy
may not work in environments where misreading can
occur.
The Number of Buyer
When firm normally set prices in secret, it is easier to
detect deviations from cooperative pricing when
each firm sells to many small buyers than when each
sells to a few large buyers.
Illustration:

Probability detection of 300 small buyers :
1 – (0.99)300 = 0.951

Probability detection of 10 large buyers : 1
– (0.99)10 = 0.096
Volatility of Demand Conditions
Price cutting is harder to detect when market demand
conditions are volatile.
If a firm’s sales unexpectedly fall, is it because market
demand has fallen or because one of its competitors
has cut price and is taking business from it?
During times of excess capacity, the temptation to cut
price to steal business can be high.
Asymmetries Among Firms and Coordination
Problems

When firms are not identical cooperative pricing
becomes more difficult

Firms differ in the incentives they face for
cooperative pricing due to
o different costs
o different capacities
o different product qualities
Asymmetries in Cost

The marginal costs are different for the
firms and so are the monopoly prices
preferred by each of the firms

Without a single monopoly price to serve as
a focal point, coordination becomes difficult

Differences in product quality can create
similar obstacles to coordination
Asymmetries in Capacity

Small firms have stronger incentives to
defect from cooperative pricing than their
larger rivals
o
Larger firms get a larger share of
the benefits of cooperative
pricing
o
Larger firms may have weak
incentives to punish small
deviators
o
Small firms have a large set of
potential customers to attract by
price cutting
Price Sensitivity of Buyers

When buyer are price sensitive, a firm that
undercuts its rivals price by even a small
amount may be able to achieve a significant
boost in its volume.

A key factor shaping buyers price sensitivity
is the extent to which competing firms
product are horizontally different.
Practices that Facilitate Cooperative Pricing
Firms can facilitate cooperative pricing
by:

Price leadership

Advance announcement of price changes

Most favored customer clauses

Uniform delivered pricing
Price Leadership
Situation in which a market leader sets the price of a
product or service, and competitors feel compelled to
match that price.
(Investorworld.com)

The price leader in the industry announces
price changes ahead of others and they
match the leader’s price

The system of price leadership can break
down if the leader does not retaliate if one of
the follower firms defects
Advance Announcements of Price Changes

Advance announcement reduces the
uncertainty that the rival will undercut the
firm

Advance announcement also gives the firm
the opportunity to roll back the changes if
the rival does not match
Most Favored Customer Clauses

Most favored customer clause allows the
buyer to pay the lowest price charged by the
seller

While this clause appears to benefit the
buyer (a price cut to any one customer
lowers the price for the most favored
customer) it also inhibits price competition
Uniform Delivered Pricing

When transportation costs are significant,
pricing could be either
◦
uniform FOB pricing or
◦
uniform delivered pricing

With uniform delivered pricing, the response
to price cutting can be “surgical” and
effective in deterring defection from
cooperative pricing
Quality Competition

Competition need not be in the price
dimension alone

“Quality” can be a term that encapsulates all
the non-price variables that increase the
demand for the product at any given price
Quality and Price

When customers are fully informed and are
able to evaluate the quality of the products,
the price per unit of quality will be the same

If customers are unable to evaluate quality
◦
a lemons market may emerge
◦
free rider problem may lead to
underinvestment in information
gathering
Market with Some Uninformed Customers

Some customers are informed and others are
not

Uninformed customers cannot gauge quality
by observing informed customers

Some low quality producers can sell at the
going prices, driving out the high quality
producers (lemons market)
Free Riders and Underinvestment

If uninformed customers can learn by
observing informed customers, they are free
riders

Customers who invest in information
gathering will find that they are no better
than those who did not make that investment

Leads to underinvestment in information
gathering
Is Quality Really Free?

If a firm is inefficient in its production it can
boost quality and reduce costs at the same
time

If a firm is already producing efficiently,
quality improvements will entail additional
cost - quality is not free
Benefits from Improved Quality

When a firm increases the quality of its
products, the benefits actually received
depend on two factors
◦
the increase in demand
◦
the incremental profit per unit
Increase in Demand due to Increase in Quality

Even without customer loyalty, inability of
the customers to judge quality will work
against an increase in demand

Sellers may rely on easily observable
attributes to communicate quality (marble
floors in banks, diplomas displayed, clothes
make the man (or woman!)
Incremental Profit per Unit from Quality Increase

All else given, a seller with a higher pricecost margin is likely to benefit more from
increased sales

A monopolist may have a high price-cost
margin but few marginal customers

Similarly, horizontal differentiation can
boost price-cost margins but lead to fewer
marginal customers
CHAPTER 10: ANALISIS INDISUTRI
Yang termasuk ke dalam analisis industri:
 Penilaian atas kinerja industri dan
perusahaan
 Identifikasi atas faktor – faktor yang
mempengaruhi kinerja
 Penentuan dampak dari perubahan yang
terjadi di dalam lingkungan bisnis terhadap
kinerja
 Identifikasi peluang dan ancaman yang
mungkin terjadi.
THE FIVE-FORCES FRAMEWORK
PERSAINGAN INTERNAL
 Persaingan internal mengacu pada
persaingan atas pangsa pasar di dalam
industri terkait.
 Kompetisi dapat berlangsung dalam dimensi
harga maupun non-harga




Kompetisi harga menurunkan keuntungan
dengan menekan price-cost margin
Kompetisi non-harga menurunkan
keuntungan dengan menaikkan fixed cost
dan marginal cost.
Dalam kondisi dimana perusahaan dapat
mentransfer kenaikan biayanya kepada
konsumennya dalam bentuk kenaikan harga,
maka kompetisi non-harga akan memiliki
pengaruh yang lebih kecil terhadap
penurunan profit dibandingkan dengan
kompetisi harga
Kondisi-kondisi yang mendorong terjadinya
kompetisi harga:
 Adanya banyak penjual di dalam pasar
 Perkembangan industri yang stagnan
atau menurun
 Perbedaan biaya antar perusahaan
 Kelebihan kapasitas
 Produk-produk yang tidak
terdiferensiasi/ switching cost yang
rendah
 Harga dan penjualan yang tidak
teramati
 Order pesanan yang besar atau jarang
 Kurangnya “facilitating practices”
 Strong exit barriers
ENTRY
 Masuknya pemain baru mengikis
keuntungan incumbent dengan dua cara:
 Entrants membagi permintaan yang
ada di pasar
 Entrants menurunkan konsentrasi pasar
 Beberapa hambatan entry eksogenus, hasil
dari syarat-syarat tercapainya keberhasilan
sebuah kompetisi
 Beberapa yang lain endogenus, hasil dari
pilihan strategis yang dibuat oleh
incumbents
 Faktor-faktor yang mempengaruhi ancaman
yang disebabkan oleh entry:
 Perbandingan antara skala efisiensi
minimum dengan ukuran pasar
 Loyalitas konsumen terhadap suatu
merek, dan nilai barang tersebut di
mata konsumen.
 Akses pendatang terhadap sumber –
sumber yang penting, seperti bahan
mentah, teknis ‘know how’, dan
jaringan distribusi.
 Kebijakan – kebijakan pemerintah
yang membela perusahaan –
perusahaan besar.
 Pengalaman pemain lama.
 Jaringan luas yang memberikan
incumbents keuntungan
 Reputasi incumbents mengenai
perilaku kompetitif paska entry
SUBSTITUTES AND COMPLEMENTS
 Barang substitusi mengikis keuntungan
perusahaan dengan cara yang sama seperti
entrants, mencuri bisnis dan meningkatkan
persaingan internal
 Barang komplementer meningkatkan
permintaan di dalam industri
 Faktor-faktor yang harus diperhatikan dalam
menilai barang substitusi dan komplementer:
 Keberadaan barang substitusi dan
komplementer
 Karakteristik nilai dari barang substitusi
dan komplementer
 Elastisitas harga dari permintaan industri
SUPPLIER AND BUYER POWER
 Suppliers dapat mengikis profitabilitas
perusahaan-perusahaan hilir jika:
 Industri hulu terkonsentrasi
 the customers are locked into the
relationship through relationship specific
assets
 Faktor-faktor yang menentukan daya
supplier:
 Kemampuan kompetitif dari elemen pasar
 Konsentrasi relatid antara perusahaanperusahaan di industri di hulu dan hilir
 Volum pembelian yang dilakukan
perusahaan hilir
 Perluasan investasi hubungan yang
spesifik
 Adanya barang-barang substitusi
 Ancaman integrasi yang dilakukan
supplier
 Kemampuan supplier dalam
mendiskriminasikan harga
STRATEGIES FOR COPING WITH THE FIVE
FORCES
 Beberapa strategi untuk mengantisipasi ancaman atas
laba dari perusahaan di dalam suatu industri:
 Mengembangkan keunggulan kompetitif
dalam hal biaya
 Perusahaan mencari segmen industri
dimana five-forces kurang berpengaruh
 Mencoba untuk mengubah kerangka fiveforces dengan cara:

Menetapkan facilitating practices
atau menciptakan switching cost

Pursuing entry-deterring
strategies

Mengurangi kekuatan dari
supplier/ buyer melalui integrasi
tapered
COOPETITION AND THE VALUE NET
 Kerangka five forces cenderung melihat
perusahaan lain, baik itu kompetitor,
suppliers ataupun buyers, sebagai ancaman
terhadap keuntungan




Brandenberger and Nalebuff
mengemukakan bahwa interaksi antara
perusahaan dapat berdampak positif maupun
negatif, dan menekankan beberapa interaksi
positif yang diabaikan oleh Porter pada
kerangka five-forces
Contoh interaksi positif antar perusahaanperusahaan:
 Perusahaan bekerjasama dalam
menetapkan standar industri yang dapat
mendukung perkembangan industri
tersebut
 Perusahaan bekerjasama dalam melobi
pemerintah terkait dengan regulasi pada
industri tersebut
 Perusahaan bekerjasama dengan supplier
untuk meningkatkan kualitas produk
sehingga dapat meningkatkan permintaan
di pasar
 Perusahaan dapat bekerjasama dengan
supplier untuk meningkatkan efisiensi
produksi
The Value Net serupa dengan five forces,
melibatkan suppliers, customers,
competitors, dan complementors.
Jika analisis five-forces mengutamakan
ancaman atas keuntungan perusahaan,
sebaliknya analisis Value Net
mengutamakan peluang.
INDUSTRY ANALYSIS:
Commercial Airframe Manufacturing
MARKET DEFINITION
 Analisis yang dilakukan terbatas padda
industri penerbangan komersial
 Boeing dan Airbus menguasai seluruh pasar
industri pesawat terbang yang memiliki
kapasitas lebih dari 100 kursi.
 Boeing dan Airbus berkompetisi secara
global
 Pemain lain yang memproduksi pesawat
berkapasitas kurang dari 100 kursi memiliki
kontribusi pangsa pasar sebesar 25%
INTERNAL RIVALRY



Subsidi dari pemerintah Eropa
memungkinkan Airbus untuk menjual lebih
murah dibandingkan dengan Boeing untuk
pesawat yang sejenis
Boeing memiliki harga yang kompetitif,
karena adanya kerjasama dalam penyediaan
pesawat militer
Sedikitnya perbedaan produk pesawat yang
dihasilkan oleh Airbus dan Boeing

Maskapai penerbangan cenderung loyal
pada satu manufaktur dimana Airbus dan
Boeing membuat spare part pesawat yang
dapat digunakan untuk beberapa model yang
berbeda
BARRIERS TO ENTRY
 Biaya pengembangan yang sangat tinggi
 High development cost and the experience-based
advantage of the incumbents
 Maskapai enggan membeli dari pemain baru
 Maskapai penerbangan lebih memilih membeli
pesawat dari satu perusahaan manufaktur.
SUBSTITUTES AND COMPLEMENTS
 Perusahaan yang memproduksi pesawat – pesawat
berukuran kecil dapat mengurangi permintaan akan
pesawat yang diproduksi oleh Boeing dan Airbus
 Keberadaan Alternatif transportasi yang lain dapat
menggantikan alat transportasi udara,
(Misal Kereta Berkecepatan tinggi).
SUPPLIER POWER
 Boeing dan Airbus tidak memiliki suatu unit ataupun
divisi tersendiri dalam memproduksi mesin jet.
 Untuk Spare part, perusahaan penerbangan langsung
bernegosiasi dengan pemasok/supplier
 Serikat pekerja memiliki kekuatan yang signifkan.
BUYER POWER
 Dua kelompok pembeli
 Maskapai Penerbangan
 Perusahaan Pembiayaan
 Setiap pemesanan dari dua kelompok pembeli
tersebut dapat memberikan kontribusi terhadap
pendapatan perusahaan hingga 15% dari pendapatan
setiap tahunnya.
 Pembeli juga dapat membatalkan pemesanan jika
kondisi perekonomian mengalami resesi.
FORCE
THREAT TO PROFITS
Entry
Low
Internal Rivalry
Low to Medium
Supplier Power
Medium
Buyer power
Medium
Substitutes/ Complements
Medium to High
CHAPTER 12: Sustaining Competitive Advantage








Introduction Case
FedEx vs UPS
◦ 1973 : monopolized business overnight
delivery in US
◦ 1985 : UPS was able to match FedEx’s
nationwide overnight service offering
◦ 2004 : UPS : 40% of total express-mail
market vs FedEx 45%
 UPS enjoyed higher profit margin
because of scale of economies using
existing fleet of delivery trucks
Perfectly competitive market : price
competition will ensure that competitive
advantage will not be sustained
Even without perfect competition :
sustaining competitive advantage is not easy
Rivals can imitate a successful firm’s
products or neutralize the firm’s advantage
through new technologies, products and
business practices
Some firms have been successful in
sustaining their competitive advantage
(Coca-Cola in soft drink, Walgreens in
pharmacy and drug retailing)
Others have allowed their competitive edge
to erode under pressure from their
competitors
In industries where firms offer differentiated
products, potential profits can be reduced
through entry and imitation by other
companies.



•
•
•
•
•
•
Unlike perfect competition, a
monopolistically competitive seller can raise
its price without losing all of its customers.
If current sellers are making profits, and
there is a free entry into the market, new
firms will enter.
By slightly changing themselves from
current firms, these new firms will find their
own niches and will certainly take some
business from current firms.
◦
Luxury Car
◦
Electronic (TV)
Consumer have identical tastes (I1, I2, I3)
Existing product @Price – quality position
(PA, qA)
New Entrant lower price – higher quality
(PB, qB)
Perfectly competitive equilibrium (Pz, qz) > economic profits are zero
The efficient frontier is the theoretical
boundary that no firm can cross
Free entry and costless imitation will force
all the firms to move to the tangency point
and the economic profit will be zero
•
Dennis Mueller’s study of profit persistence
reports the following :
• Firms with abnormally high ROA will
experience a decline over time
• Firms with abnormally low ROA will
experience an improvement over time
• High ROA firms and low ROA firms do
not converge to a common mean

Resource based theory of the firm explains
sustained competitive advantage in terms of
heterogeneity in resources and capabilities
◦ Resources : firm specific assets & factor
production, such as patterns, brand-name
reputation, intstalled base, & human
assets
◦ Distinctive capabilities : activities that the
firm does better than competitors
Scarce resources and capabilities that are
critical for value creation can be imperfectly
mobile and cannot be acquired in the open
market
Imperfectly mobile means that the resource
cannot “sell itself” to the highest bidder
Resource based theory of the firm explains
sustained competitive advantage in terms of
heterogeneity in resources and capabilities
◦ Resources : firm specific assets & factor
production, such as patterns, brand-name
reputation, intstalled base, & human
assets
◦ Distinctive capabilities : activities that the
firm does better than competitors
Scarce resources and capabilities that are
critical for value creation can be imperfectly
mobile and cannot be acquired in the open
market
Imperfectly mobile means that the resource
cannot “sell itself” to the highest bidder




Even in oligopolistic or monopolistic
markets, where new entry might be
blockaded or deterred, a successful current
firm may not stay that way for long.
◦ A success factor for current firms could
be one that it cannot control, such as
weather or general business conditions.
Ex. Colorado blizzard delayed Coors
sales to the West Coast, but boosted
Budweiser and Miller Sales temporarily
on the West Coast.
If one firm is having good luck and another
firm is having bad luck, it is unlikely that
both firms will continue on to persist that
same way. The possibility of regression
toward the mean means that one should not
expect those firms to repeat extreme
performances, whether good or bad, for long.




•
•
•
•
If there are impediments to the competitive
dynamic, then profits should persist: Firms
that earn above-average profits today should
continue to do so in the future; low-profit
firms today should remain low-profit firms
in the future.
Mueller (economist) suggests that firms with
abnormally high levels of profitability tend,
on average, to decrease in profitability over
time, while firms with abnormally low
levels of profitability tend, on average, to
experience increases in profitability over
time.
However, the profit rates of these two
groups of firms do not converge to a
common mean. The firm that starts out with
high profits will converge to rates of
profitability that are higher than the rates of
the firm that starts out with low profits.
Mueller’s work implies that market forces
are a threat to profits, but only up to a point

Impediments to Imitation: The isolation
mechanisms impede existing firms potential
entrants from duplicating the resources and
capabilities that form the basis of the firm’s
advantage
◦ Example: Callaway’s distinctive
capabilities in designing innovative golf
clubs and golf balls
Early-mover advantage: Once a firm
acquired a competitive advantage, these
isolation mechanisms increase the economic
power of that advantage over time.
◦ Example : Cisco Systems that dominates
the market for products such as routers
and switches, which link together LANs
(Local Area Networks)
 1990s : Cisco System earned rates of
return that vastly exceeds its cost of
capital
 1992 – 1996 : earned 40.36% average
spread
 2000 – 2001 : Cisco continued to
outperform its industry peers even
after the crash of network equipment
business in the wake of the technology
meltdown
(a) The initial cost-quality position of all firms in the
market is (C0, q0). Following a shock, firm G achieves
a competitive advantage based on higher quality &
lower cost. (b) Impediments to imitation: as time
passes, G’s competitors may be able to reduce costs and
increase quality, but they cannot duplicate G’s superior
cost-quality position. (c) The dynamics of an earlymover advantage : as time passes, G’s cost and quality
advantage over competing firm grows more pronounced
Shock refers to fundamental changes that lead to major
shifts of competitive position in a market. Examples :
proprietary process / product innovation, discoveries of
new sources of consumer value / market segments,
shifts in demand or tastes, or changes in regulatory
policy that enable firms to significantly shift their
strategic position in a business
They are four Impediments to imitation :

Legal restrictions

Superior access to inputs or customers

Market size and scale economies

Intangible barriers to imitating a firm’s
distinctive capabilities:
◦ casual ambiguity,
◦ dependence on historical circumstances,
◦ and social complexity







Legal restrictions, such as patents,
copyrights, and trademarks, as well as
government control over entry into markets,
through licensing, certificate, or quotas on
operating rights, can be powerful
impediments to imitation.
Patents ,copyrights ,trademarks, and
operating rights can be sold.
A purchase of a patent or operating right to
secure a competitive advantage is
considered a highly mobile resource.
Mobility of a asset also implies that a owner
of a patent or operating right may be better
off selling it to another firm.
Once a patent or operating right is secured,
its exclusivity gives it sustainable value
Superior access to inputs allow a firm
A firm that secures access to the best
distribution channels or the most productive
retail locations will hold the advantage
competing for customers over other firms.





The control of scare inputs or distribution
channels allows a firm to earn large
economic profits .
Superior access to inputs or customers can
confer sustained competitive advantage only
if the firm can secure access at “belowmarket” prices.
The winner’s curse : the firms that wins the
bidding war for an input may be overly
optimistic about its value. The winning
bidder may end up overpaying for the asset
firm that can obtain high-quality or highproductivity inputs, such as raw materials or
information, will be able to sustain cost and
quality advantages that its competitors
cannot imitate.
A firms can achieve favorable access to
inputs by controlling the source of supply
through ownership or long-term contracts.
 Example :
 International Nickel dominated the
nickel industry for 75 years by
controlling the highest-grade deposits
of nickel in western Canada
 Topps monopolized the market for
baseball cards in the United States by
signing every professional baseball
picture on baseball card sold with gum
or candy












Imitation may also be deterred when
minimum efficient scale (MES) is large
relative to market demand, and a firm has
secured a large amount of the market.
Economies of scale can limit the number of
firms that “fit” in a market and represent a
barrier to entry.
Scale economies can also discourage a
smaller firm already in the market from
seeking to grow larger to imitate the scale
based cost advantage of a firm that has
obtained a large market share.
Scale based barriers to imitation and entry
are more powerful in markets were
specialized products or services are largely
demanded enough to support a large firm.
Scale based advantages can only be
sustained if demand doesn’t grow to large
Production Technology is characterized by economies
of scale with Long run average cost function (LAC)
declining until minimum efficient scale (MES): 4000
units / years
Small Firm
Big Firm
A scale based advantage can be sustainable only if
demand does not grow too large, otherwise, the growth
in demand will attract additional entry or induce smaller
competitors to expand, allowing them to benefit from
economies of scale
There are three distinct intangible barriers to imitation :

Casual ambiguity

Dependence on historical circumstances

Social complexity
Casual Ambiguity refers to situations in
which the causes of a firm’s ability to create
more value than its competitors are obscure
and only imperfectly understood.
Casual ambiguity is a consequence of the
fact that a firm’s distinctive capabilities
typically involve tacit knowledge.
Tacit capabilities are typically developed
through trial and error and refined through
practice and experience; rarely are they
written down on a manual.
For this reason, casual ambiguity are a
powerful impediment to imitation by other
firms.
An firms history of strategic action
compromise its unique experiences in
adapting to the business environment.
These experiences can make a firm uniquely
capable of pursuing its own strategy and
incapable of imitating the strategies of
competitors.
◦ Southwest strategies :
 The operational efficiencies & the
pattern of labor relations
 It’s difficult to imitate by American &
United
Historical dependence also implies that a
firm’s strategy might be viable for a limited
time
◦ People’s Express : low price strategy
based on lower labor costs (because of
the new deregulation)
◦ If competitors can renegotiated labor
contracts  People’s Express will not
sustain its advantage








A firm’s advantage may be imperfectly
imitable because socially complex process
underline the advantages.
Socially complex phenomena include the
interpersonal relations between the firm’s
managers and those of it’s suppliers and
customers.
Social complexity is distinct from casual
ambiguity.
◦ Important contributor to Toyota success :
 The trust between it and its component
suppliers

There are four distinctive isolating
mechanisms that fall under the heading of
early-mover advantages :
◦ Learning Curve
◦ Network Externalities
◦ Reputation and Buyer Uncertainty
◦ Buyer Switching Costs

Experienced firms will have a better
advantage by jumping in first.
Firms with greater experience are able to
increase volume and enhance their cost
advantage over other firms






Goods with customer experience and
reputation will be desired over unknown
products.
Early mover will be able to obtain this
advantage much easier than later movers.
Buyer uncertainty coupled with reputational
effects can make a firm’s brand name
powerful isolating mechanism








Buyers incur substantial costs when
switching to another supplier.
Lost knowledge to product line.
Consumers often place higher value on a
product if other consumers also use it.
Actual network : the network effect arises
because consumers can communicate with
other users in the network  via telephone &
email networks
Virtual network : the network effect arises
from the use of complementary goods
◦
Windows-based PC
◦
Video Gaming : Sony Playstation
◦
eBay
Early mover is able to capture a large share
of a growing market
Competition between early mover advantage
can be intense.



◦ Microsoft Word  Word Perfect
Early mover has advantage here due to
customer knowledge of product
◦ Develop loyalty program : frequentcustomer point
◦ Lego Castle playset for their children are
likely to buy other Lego Castle products
because the parts are interchangeable and
share the same look & feel
Developing new technology or products
does not always guarantee a firms success.
Many lack complementary assets (ex.CAT
from EMI)
Fail to establish competitive advantage
because they bet on the wrong technologies
or products
Luck can play an important role in success.
With imperfect imitability and otherwise
competitive conditions, average firms will
make below average profits and some firms
consistently earn economic profits
If the firms are uncertain about their postentry position, pre-entry (ex-ante) expected
economic profit will be zero
The most efficient firm in this industry can
achieve the lowest AVC. There are many
entrants into this market, but because
imitation is imperfect, not all of them can
emulate those that achieve the low-cost
position in the market.
The different Average Variable Cost (AVC)
function that a firm might have if it enters
this market. Since AVC is contants cup to
the capacity of 1 million units per year, the
AVC = MC.
The firm’s AVC can take on one of five
values, $1, $3, $5, $7, or $9, each with equal
(i.e. 20%) probability.

The equilibrium price in this market $6 per
unit

At $6 / unit, each firm’s expected economic
profit is zero
At the equilibrium price : the operating profits = the
cost of entry. Some will find that their AVC is greater
than price and will drop out the market
CHAPTER 13: