Defensive tactics of the firm

Defensive strategy aims to influence a challenger’s calculation of the expected return from entry or repositioning, causing the challenger to conclude that the move is unattractive or to opt for a strategy that is less threatening. To do this, a defender invests in defensive tactics. Most defensive tactics are costly and reduce short-term profitability

Evaluating defensive tactics of the firm

The defensive tactics described above differ greatly in their characteristics and in their appropriateness for a firm. A firm must decide which tactics will be most effective in its industry in view of the potential challengers it faces. A number of important tests can be used to assess defensive tactics: Value to Buyers. A

Defensive strategy of the firm

Combined with an offensive strategy to increase a firm’s competitive advantage, an explicit defensive strategy can raise the sustainability of whatever competitive advantages a firm possesses. The ideal of defensive strategy is usually deterrence—preventing a challenger from initiating a move in the first place or deflecting it to become less threatening. The other type

Conditions for attacking an industry leader

The cardinal rule in offensive strategy is not to attack head-on with an imitative strategy, regardless of the challenger’s resources or staying power. The built-in advantages inherent in a leader’s position will usually overcome such a challenge and the leader will in all likelihood retaliate vigorously. The ensuing battle will almost inevitably exhaust the

Avenues for attacking industry leaders

Successfully attacking a leader always requires some kind of strategic insight. A challenger must usually find a different strategy in order to neutralize the leader’s natural advantages, and recognize or create impediments to leader retaliation. While the strategies that have succeeded against leaders differ widely from industry to industry, three avenues of attack emerge

Impediments to leader retaliation

A successful challenger must also discover or create impediments to leader retaliation. This serves to blunt the natural advantages of the leader and reduces the cost of mounting an attack. A variety of factors can inhibit a leader’s retaliation to a challenger: Mixed Motives. If a challenger’s strategy creates mixed motives for a leader,

Signals of leader vulnerability

The preceding discussion suggests a variety of signals that can indicate that a leader is vulnerable. These fall into two groups—industry signals and signals based on leader traits. 1. Industry Signals Structural change provides perhaps the strongest signal that an industry leader might be vulnerable. Structural change emanating from outside an industry is a

Attacking leaders and industry structure

A final test for attacking a leader is to weigh the effect on overall industry structure. A challenger’s attack on a leader is unwise if it destroys industry structure. Challengers must find a new way of competing compared to the leader’s to succeed. However, the new way of competing, in some cases, may undercut

Toward a new institutional economics: Some Antecedents

The materials in this section are in no sense a survey. They merely indi- cate an early concern among some members of the profession of the types of institutional issues that I deal with in this treatise. With the exception of the market failure literature, which is examined briefly in Section 1.4, there is

A Preliminary Statement of the Organizational Failures Framework

Although I shall defer a more complete statement of the organizational failures framework until Chapter 2 (indeed, some of the elements that appear in it are not even identified here), a sketch of the basic approach, set out early, will not only provide an overview of what will follow but also permit some immediate

Toward a new institutional economics: Three Illustrations

Whether the proposed approach leads to a better understanding of or to implications different from those found in received microtheory can best be established by addressing it to particular economic phenomena. Three are examined here: price discrimination, the insurance problem, and Stigler’s life cycle treatment of vertical integration. Although the first of these does

The organizational failures framework: Bounded Rationality and Uncertainty/Complexity

1. General Bounded rationality refers to human behavior that is “intendedly rational, but only limitedly so” (Simon, 1961, p. xxiv). Although it is widely appreciated that human decision makers are not lightning calculators, and occasionally this fact is explictly taken into account in abstract models of market processes ( Radner. 1968), the implications for

The organizational failures framework: Opportunism and Small Numbers

1. General Opportunism extends the conventional assumption that economic agents are guided by considerations of self-interest to make allowance for st™ eg,c behavior. This involves self-interest seeking with guile and has profound implications for choosing  between alternative contractual relationships. Such strategic interaction has been discussed in other contexts by other writers; Schelling’s (1960) and Coffman’s

The organizational failures framework: Information Impactedness

Information impactedness is a derivative condition that arises mainly because of uncertainty and opportunism, though bounded rationality is involved as well. It exists when true underlying circumstances relevant to the transaction, or related set of transactions, are known to one or more parties but cannot be costlessly discerned by or displayed for others. It

The organizational failures framework: Atmosphere

1. General The power of economics, in relation to the other social sciences, is to be traced in no small part to its unremitting emphasis on net benefit analysis. Care must be exercised, however, lest problems be construed too narrowly. This will occur if net benefits are calculated in transaction-specific terms, when in fact

The organizational failures framework: Summary Remarks

At the risk of oversimplification, the argument of the preceding sections of this chapter can be summarized by the schematic in Figure 3. The main pairings are shown by the heavy double-headed arrows which associate bounded rationality with uncertainty/complexity on the one hand and op- portunism with a small-numbers exchange relations on the other.

Peer Group Associations

In order to avoid imputing benefits to hierarchy that can be had, in some degree, by simple nonhierarchical associations of workers, it will be useful to begin with an examination of worker peer groups. These groups involve collective and usually cooperative activity, provide for some type of other-than-marginal productivity and income-sharing arrangement, but do

Peer Group Limitations

That peer groups may have attractive properties in relation to the market for at least some individuals should be apparent from the above. But they also experience very real limitations. In comparison with both market and hierarchical organization, peer groups, being loose metering structures, are vulnerable to free rider abuses. In addition, collective decision-making

Simple Hierarchy of organization

That peer groups sometimes offer advantages in relation to autonomous contracting is apparent from the discussion in Section 1. But as Section 2 makes clear, peer groups also face limitations in both opportunism and bounded rationality respects. The restricted range of control techniques to which peer groups have access, in seeking to mitigate these

Involvement in organization

It would appear, from the above arguments, that simple hierarchy can do everything the peer group can do and more. It can contend better with indivisibilities of both physical and informational types, since it has superior bounded rationality properties. (Not that bounded rationality vanishes; rather, simple hierarchy economizes on the use of scarce bounded