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The challenge
An incumbent firm already operating successfully in an industry improves existing
barriers to entry and erects new ones. Any challenger firm wishing to enter the
industry must attempt to overcome these barriers. This does not necessarily mean
attacking the market leader head-on. This is a risky strategy in any case, because of the
incumbent firm's resources in cash, promotion and innovation. Instead, the challenger
may attack smaller regional firms or companies of similar size to itself that are vulnerable
through lack of resources or poor management.
Military analogies have been used to describe the challenger's attacking options.
.
1. The encirclement attack consists of as large a number of simultaneous flank attacks
as possible in order to overwhelm the target.
2. The bypass attack is indirect and unaggressive. It focuses on unrelated products,
new geographic areas and technical leap-frogging to advance in the market.
3. Guerrilla attack consists of a series of aggressive, short-term moves to demoralise,
unbalance and destabilise the opponent. Tactics include drastic price cuts, poaching staff,
political lobbying and short bursts of promotional activity
The response
If the incumbent makes no response to the initial campaign, the challenger will widen its
attack to other, related or vulnerable market segments, using similar methods to those
outlined above. On the other hand, the incumbent may respond; this will often be by
means that amount to reinforcing the barriers to entry, such as increasing promotional
spending.
Military analogies have also been used to describe defensive strategies for market
leaders.
(a) Position defence relies upon not changing anything. This does not work very well.
(b) Mobile defence uses market broadening and diversification.
(c) Flanking defence is needed to respond to attacks on secondary markets with
growth potential.
(d) Contraction defence involves withdrawal from vulnerable markets and those with
low potential. It
may amount to surrender.
(e) Pre-emptive defence gathers information on potential attacks and then uses
competitive
advantage to strike first. Product innovation and aggressive promotion are important
features.
A challenger faced with such moves may decide to start a price war. The disadvantage
of this is that it will erode its own margins as well as those of the incumbent, but it does
have the potential to reshape the market and redistribute longer-term market share.
Fighting back
An incumbent faced with a vigorous and resourceful challenger may decide in turn to
attack the entrant's own base, perhaps by cutting price in its strongest market. This
may have the result of causing the challenger to move on towards entry into another
attractive market as it seeks to expand.
Resource implications
Both attacking and defending require the deployment of cash and strategic skill. In
particular, extending competition to new geographical and national markets can raise the
risks and costs involved to an extent that inhibits rivalry.
Hypercompetition
It is possible for competition in an industry to cycle fairly slowly, with extended periods of
stability. This
allows the careful building of competitive advantages that are difficult to imitate.
Hypercompetition, by contrast, is a condition of constant competitive change. It is
created by frequent, boldly aggressive
competitive moves. This state makes it impossible for a firm to create lasting competitive
advantage; firms that accept this will deliberately disrupt any stability that develops in
order to deny long-term advantage to their competitors. Under these conditions,
continuing success depends on effective exploitation of a series of short-term moves.
Another important control is lack of adequate technical knowledge in key roles, for
example in the audit committee or in senior compliance positions. A rapid turnover of
staff involved in accounting or control may suggest inadequate resourcing, and will make
control more difficult because of lack of continuity.
.4 Lack of supervision
Employees who are not properly supervised can create large losses for the organisation
through their own incompetence, negligence or fraudulent activity. The behaviour of Nick
Leeson, the employee who caused the collapse of Barings bank was not challenged
because he appeared to be successful, whereas he was using unauthorised accounts to
cover up his large trading losses. Leeson was able to do this because he was in charge of
both dealing and settlement, a systems weakness or lack of segregation of key roles
that featured in other financial frauds.
company. The chain of accountability may then continue, with those representatives
themselves are accountable ultimately to the individual savers and investors that provide
their funds.
This separation of ownership from control has been a feature of business for over a
century and brings with it a recurring problem: the business should be managed so as to
promote the economic interest of the shareholders as a body, but the power to manage
lies in the hands of people who may use it to promote their own interests. How may such
conflicts of interest be resolved and managers be made to favour the interest of the
owners rather than their own?
This problem is not confined to the management of companies: it is the general problem
of the agency relationship and occurs whenever one person (the principal) gives
another (the agent) power to deal with his or her affairs. The relationship between
principal and agent has been subjected to some quite abstruse economic and
mathematical analysis; this area of study is called agency theory. It proceeds on the
basis that principals and agents are rational utility maximisers.
Two important concepts are used to explain the things that can go wrong in the agency
relationship:
adverse selection and moral hazard.
Adverse selection is the making of poor choices. It occurs perhaps most often because
the chooser lacks
the information necessary to make a good choice.
Adverse selection can be exacerbated in the agency relationship when the agent has an
incentive to
With hold information from the principal, thus creating information asymmetry. We see
this in two
important instances:
(a) Appointment of the agent: the principal attempts to appoint a competent and
trustworthy agent,
but potential agents thus have an incentive to conceal any evidence there may be that
they are
incompetent or untrustworthy.
(b) Assessing the agent's performance: the principal desires to reward the agent
according to the
standard of their performance, but the agent controls or is able to influence the
information the principal uses to assess that performance.
Disclosure is thus a major theme in corporate governance.
Moral hazard arises whenever people are protected from the adverse consequences of
their actions; they have no incentive to exercise correct judgement and are free to act in
an irresponsible manner.
To protect a person from the adverse consequences of their behaviour is to encourage
irresponsibility, hence the moral dimension of the concept.
Moral hazard is not confined to principal-agent relationships. It occurs in banking, for
example, when government guarantee schemes allow bankers to make injudicious loans.
In the agency relationship, we are concerned with the use the agent makes of the
authority with which they have been entrusted. Moral hazard will exist unless at least
part of the agent's remuneration is contingent upon them making responsible use of their
authority.
Agency theory is clearly relevant to the modern business organisation. The directors are
the agents of the shareholders, employed to manage the business in the shareholders'
interest. To do this they are given considerable power over the resources of the business.
How can the shareholders be sure that they will not abuse this trust?
To a lesser extent, agency theory also applies within the organisation. The directors
cannot do everything: as we have said, they must employ subordinate managers to put
their plans into action. How can the directors be sure that those subordinates are not
abusing their trust?