Intra-Industry Analysis

and Strategic Interaction

vs.

Competitor Analysis and

Competitive Intelligence

Systematic collection and analysis of

information about rivals (and potential rivals)
to inform decision making:

• To forecast competitors’ future strategies and

decisions

• To predict competitors’ likely reactions to a firm’s

strategic initiatives

• To determine how competitors’ behavior can be

influenced to make it more favorable

Competitive Analysis is a Growing Field

 Fine Line between Legitimate
Intelligence and Illegal Espionage
•Distinction between public and private
information can be uncertain

•Law relating to trade secrets is less precise

than laws covering patents and copyrights

Well Publicized Cases

of Information Theft

$920M verdict over theft of

trade secrets covering Dupont
Kevlar fiber production
$100M fine for theft of
Ferrari technical information

Pizza Plot
 Marc Barry,
Private Investigator
(and his telephone)

Framework for Competitor Analysis

Strategy
• How is the firm competing?
• Revealed intent (Pattern in its choices)?

Objectives
• What are competitor’s current goals?
• Is performance meeting these goals?
• Goals likely to change?
Resources and Capabilities
• What are the competitor’s key
strengths?
• Which are particularly important for
this business?
Predictions
• What strategic changes will
the competitor initiate?
• How will the competitor
respond to our strategic
initiative?

Assumptions
• What assumptions or opinions does
the competitor hold about the
industry and itself? Source: Grant (2013)

Intra-Industry Analysis
and Strategic Interaction

vs.
vs.
 Richard Brooke,

BSB Treasurer

“We were not concerned about

competitive threats until Sky
came along.
Murdoch’s announcement came
from left field and took
everybody by surprise.”

Competitor Analysis (Murdoch)

Strategy/Objectives

Resources/Capabilities

Assumptions

Murdoch Key Facts

• Failed bid for British DSB
• Controls 1/3 of British newspaper
market, but growing emphasis on
electronic media
• Global vision (thus prefers satellite over
cable)
• Made satellite goal credible (European
satellite system over Malta; buys 69%
stake of SATV)
• Controls 20th Century Fox film library
• Considers British broadcasting and
news to be stodgy - unmet market need
• Circumvented rejection of Australian TV
station bid
 Prediction:

Likely to enter or “go

away”?

Why didn’t BSB management

see Rupert Murdoch coming?

Could BSB have done anything

differently to improve its profit
potential and/or reduce the
threat of entry by Sky?
 Competitive Positions (Fall 1990):

175K dishes installed 946K dishes

Outselling 2-1 in past 3 mos
Deeper pockets
Has lost £800m
Losing £6-7 m/week
8 years away from break-even
Cash poor
Has lost £450m
Losing £2.2 m/week
4 years away from break-even

Using Game Theory to

make strategic decisions

What should BSB do in 1990?

Steps:

1. Evaluate the situation

2. Define the “game” (focus on feasible,

important actions)

3. Evaluate the payoffs to BSB, Sky

4. Decide what to do

Sidebar: Diaper Wars

Strategic Interaction: If I believe that my competitors are
rational and act to maximize their own profits, how should I
take their behavior into account when making my own profit-
maximizing decisions?

Example 13.6: Disposable Diaper Industry

~ 50-60 % market ~ 30%

Only 2 major firms, but intense price competition

Key to success = cost-reducing innovation
Production Market
Price
Cost Share
 Should each firm spend heavily
on R&D in a race to reduce costs?

Kimberly-Clark
R&D No R&D
R&D
40, 20 80, -20
No
R&D -20, 60 60, 40
P&G

BSB-Sky Payoff Matrix:

Fight Exit

Fight

Exit

Think about…

How can you use Exhibits 6 and 7 to

calculate the payoffs to BSB and Sky
TV in each of these cells?

• What types of assumptions will you need

to make?

• How would you estimate the “payoff” to

each party given those assumptions?
 Simplifying Assumptions
• Accept market projections in Exhibits 6 & 7 (e.g., 80K new
dishes sold each month, etc…)

• If one player concedes right away, it still incurs losses through

1991; it then exits the market, which the other player
monopolizes thereafter

• If both companies stay in, they are assumed to have equal

market share by 1993. Assume that the govt. would not allow
both to exit.

• Ignore losses through 1990

• Discount rate in calculating NPV is 10%

• Terminal value is estimated using stream of 90 years of 1999+

cash flows, discounted

BSB-Sky Payoff Matrix:

Fight Exit

Fight
722, -178 2951, -180

Exit -62, 2088 X

So What Happened?
They Merge: (BSkyB created in Nov. 1990)

Sky obtains operating control

• 3,000 out of 4,000 BSB employees fired
• BSB dishes replaced with Sky dishes by 1992
• Some BSB programming retained

Financial interests split 50:50

• BSB “paid” about half the merger pie (£1.5 billion) not to play
• Early cash infusion to News Corp
• BSB stake in BSkyB phases out

Overall, “…a combination of Sky’s commercial acumen with the

financial resources of BSB’s major shareholders”

Payoffs to BSB are closer to one-half than they are to zero!

 Déjà Vu

vs.

• Both companies suffer heavy losses

• Merger announced in February 2007

• Merger completed July 2008

Winner?

The Uses and Limits of Game Theory:

Luis Garicano
“Unlike other tools devised by
economists that can be applied directly
to produce numerical solutions (such as
demand curves or the Black-Scholes
option pricing model), game theory must
not be used actually to “solve” the game
and produce a numerical answer…the
solutions to the games are often too
sensitive to the assumptions that the
modeler makes about the timing of the
moves, the information available to the
players and the rationality of
decisions…”
“Instead, game theory’s greatest use is in
obtaining insights about the structure of
interaction between players, not only to
understand what is the right way to play the
game, but also to understand existing
possibilities and consequences of changing
rules.” Source: Mastering Strategy, 2000

Main Lessons
• Always recognize the threat of competition,
even if it is indirect and has yet to materialize
• Anticipate, don’t react. Thinking ahead can help
you change the nature of the game.

• A way to think ahead is to put yourself in your

competitor’s shoes and try to understand both
its economic (game theoretic) incentives and
behavioral predispositions
• Game theory adds rigor to your analysis, but
should guide—not dictate—your decision