Agency theory: Limits in the Action Space

Let us now come back to an adverse selection context. Our goal in this section is to understand how one can possibly endogenize the action space used to contract with the agent. 1. Extending the Action Space We start with a highly stylized model of procurement between a principal (the buyer) and an agent

Agency theory: Limits to Rational Behavior

Even though incentive theory has been developed under the standard assumption that all players are rational, it can take into account whatever bounded rationality assumption one may wish to choose.38 However, there is an infinity of possible theories of bounded rationality and, in each case, the modeller must derive spe- cific optimal contracts. Let

Agency theory: Endogenous Information Structures

One often heard criticism of incentive theory is that it takes information structures as given. A more complete view of organizational design should account for the endogeneity of these information structures. To investigate these new issues, we now assume that the agent does not know his type a priori but can decide or not

Structural Determinants of the Intensity of Competition

Let us adopt the working definition of an industry as the group of firms producing products that are close substitutes for each other. In practice there is often a great deal of controversy over the appro-priate definition, centering around how close substitutability needs to be in terms of product, process, or geographic market boundaries.

Intensity of Competition: Threat of entry

New entrants to an industry bring new capacity, the desire to gain market share, and often substantial resources. Prices can be bid down or incumbents’ costs inflated as a result, reducing profitabili–ty. Companies diversifying through acquisition into the industry from other markets often use their resources to cause a shake-up, as Philip Morris did

Intensity of rivalry among existing competitors

Rivalry among existing competitors takes the familiar form of jockeying for position—using tactics like price competition, adver-tising battles, product introductions, and increased customer service or warranties. Rivalry occurs because one or more competitors either feels the pressure or sees the opportunity to improve position. In most industries, competitive moves by one firm have noticeable

Intensity of Competition: Pressure from substitute products

All firms in an industry are competing, in a broad sense, with industries producing substitute products. Substitutes limit the poten-tial returns of an industry by placing a ceiling on the prices firms in the industry can profitably charge.8 The more attractive the price- performance alternative offered by substitutes, the firmer the lid on industry

Intensity of Competition: Bargaining power of buyers

Buyers compete with the industry by forcing down prices, bar-gaining for higher quality or more services, and playing competitors against each other—all at the expense of industry profitability. The power of each of the industry’s important buyer groups depends on a number of characteristics of its market situation and on the rel-ative importance of

Intensity of Competition: Bargaining power of suppliers

Suppliers can exert bargaining power over participants in an in-dustry by threatening to raise prices or reduce the quality of pur-chased goods and services. Powerful suppliers can thereby squeeze profitability out of an industry unable to recover cost increases in its own prices. By raising their prices, for example, chemical companies have contributed to

Government as a force in industry competition

Government has been discussed primarily in terms of its possi-ble impact on entry barriers, but in the 1970s and 1980s government at all levels must be recognized as potentially influencing many if not all aspects of industry structure both directly and indirectly. In many industries, government is a buyer or supplier and can influence

Structural Analysis and Competitive Strategy

Once the forces affecting competition in an industry and their underlying causes have been diagnosed, the firm is in a position to identify its strengths and weaknesses relative to the industry. From a strategic standpoint, the crucial strengths and weaknesses are the firm’s posture vis-à-vis the underlying causes of each competitive force. Where does

Structural Analysis and Competitive Strategy

A great deal of attention has been directed at defining the rele-vant industry as a crucial step in competitive strategy formulation. Numerous writers have also stressed the need to look beyond prod-uct to function in defining a business, beyond national boundaries to potential international competition, and beyond the ranks of one’s competitors today to

Three Generic Strategies

In coping with the five competitive forces, there are three poten-tially successful generic strategic approaches to outperforming other firms in an industry: overall cost leadership differentiation focus. Sometimes the firm can successfully pursue more than one approach as its primary target, though this is rarely possible as will be dis-cussed further. Effectively implementing any

Generic Strategies: Stuck in the Middle

The three generic strategies are alternative, viable approaches to dealing with the competitive forces. The converse of the previous discussion is that the firm failing to develop its strategy in at least one of the three directions—a firm that is “stuck in the middle”—is in an extremely poor strategic situation. This firm lacks the

Risks of the Generic Strategies

Fundamentally, the risks in pursuing the generic strategies are two: first, failing to attain or sustain the strategy; second, for the value of the strategic advantage provided by the strategy to erode with industry evolution. More narrowly, the three strategies are predicated on erecting differing kinds of defenses against the com-petitive forces, and not

A framework for competitor analysis

Competitive strategy involves positioning a business to maximize the value of the capabilities that distinguish it from its competitors. It follows that a central aspect of strategy formulation is perceptive competitor analysis. The objective of a competitor analysis is to de-velop a profile of the nature and success of the likely strategy changes each

The Components of Competitor Analysis

Before discussing each component of competitor analysis, it is important to define which competitors should be examined. Clearly all significant existing competitors must be analyzed. However, it also may be important to analyze the potential competitors that may come on the scene. Forecasting potential competitors is not an easy task, but they can often be identified

Putting the Four Components Together—The Competitor Response Profile

Given an analysis of a competitor’s future goals, assumptions, current strategies, and capabilities, we can begin to ask the critical questions that will lead to a profile of how a competitor is likely to respond. 1. OFFENSIVE MOVES The first step is to predict the strategic changes the competitor might initiate. Satisfaction with current

Competitor Analysis and Industry Forecasting

An analysis of each significant existing and potential competi-tor can be used as an important input to forecasting future industry conditions. The knowledge of each competitor’s probable moves and capacity to respond to change can be summed up, and competi–tors can be seen as interacting with each other on a simulated basis to answer

The Need for a Competitor Intelligence System

Answering these questions about competitors creates enormous needs for data. Intelligence data on competitors can come from many sources: reports filed publicly, speeches by a competitor’s management to security analysts, the business press, the sales force, a firm‘s customers or suppliers that are common to competitors, in-spection of a competitor’s products, estimates by the