CHAPTER 8
MANAGING GLOBAL COMPETITIVE DYNAMICS
CHAPTER OUTLINE
I. OPENING CASE: Emerging Markets: Emirates Airlines Fights Legacy Airlines
A. United Arab Emirates, Emirates Airlines has become one of the world’s most
powerful airlines
1. Launched in 1985 in Dubai, it carries 40 million passengers annually and is the
fourth-largest international airline in the world
B. Geographically, Dubai International Airport (DXB) is as a natural “pinch point”
1. It is the ideal stopping point for air traffic between Europe and Australasia and
between Africa and Asia
a. Four billion people can be reached within seven hours from DXB
b. Connecting 220 destinations, DXB handles more than 40 million passengers
a year
C. Emirates positions itself as a “super–connector” airline
1. Traditional long-haul carriers such as Air France-KLM, British Airways (BA),
Lufthansa, Qantas, and Singapore Airlines fear that Emirates can threaten their
profitable long-haul business
2. Emirates has made itself more attractive by flying newer and quieter planes, offering
cheaper tickets, and providing nicer amenities on board and at DXB
3. One secret is to fly super-sized planes—one A380 can carry 500 passengers—to
reduce cost per passenger and help undercut fares of legacy airlines
D. Legacy airlines have also complained that Emirates receives “unfair” subsidies
ranging from cheaper fuel to lower airport fees
1. However, lack of refining capacity in the Gulf means Emirates pays slightly more
E. Emirates thrives on treaties that permit flights between two countries by an airline
from a third country
1. The model works best on long-haul flights requiring refueling at DXB
2. In theory, rivals might convince European governments to deny route applications
from Emirates
Chapter 8 Managing Global Competitive Dynamics
3. However, such a political decision would hurt Airbus and European jobs
II. STRATEGY AS ACTION
A. The essence of strategy is interaction, in which actions and responses can yield
competitive advantage
B. Firms, like militaries, often compete aggressively—note the expressly military tone of
terms such as “attacks,” “counterattacks,” and “price wars”
C. Military principles cannot be completely applied in business, because the
marketplace, after all, is not a battlefield; unlike battlefields, there are win-wins in
III. INDUSTRY-BASED CONSIDERATIONS
A. Focus on the first of Porter’s five forces
1. Rivalry among competitors
2. Competing firms in an industry may engage in collusion, defined as collective
attempts to reduce competition
B. Collusion and Prisoners’ Dilemma
1. Tacit collusion: Firms indirectly coordinate actions by signaling their intentions to
reduce output and maintain price above competitive levels
2. Explicit collusion: Firms directly negotiate output and pricing and divide markets
a. This leads to a cartel—an output-fixing and price-fixing entity involving
C. Industry Characteristics and Collusion vis-à-vis Competition
1. Five factors that facilitate collusion
a. Concentration ratio: The percentage of total industry sales accounted for by
the top four, eight or 20 firms
2. High market commonality or mutual forbearance stems from two factors
a. Deterrence—if a firm attacks in one market, its rivals may engage in cross-
market retaliation
b. Familiarity—frequent interactions can result in more mutual respect
Chapter 8 Managing Global Competitive Dynamics
IV. RESOURCE-BASED CONSIDERATIONS
A. Value can be added in the following ways:
1. Patenting
2. Ability to attack in multiple markets
1. More centrally coordinated firms may be better mutual forbearers than firms
whose units are loosely controlled
2. Successfully carrying out mutual forbearance calls for organizational reward
systems that encourage cooperation
E. Resource similarity: The extent to which a given competitor possesses strategic
endowment comparable, in terms of both type and amount, to those of the focal firm
V. INSTITUTION-BASED CONSIDERATIONS
A. Formal Institutions Governing Domestic Competition: A Focus on Antitrust
1. Competition policy: Determines the institutional mix of competition and cooperation
that gives rise to the market system
2. Antitrust policy: Regulations designed to combat monopolies and cartels
prices after eliminating rivals to cover losses in the long run
4. In addition to antitrust laws, collusion often suffers from a prisoners’ dilemma
a. “Prisoners’ dilemma” derives from a simple game in which two prisoners are
separately interrogated and told that if either one confesses, the confessor
will get a one-year sentence, while the other will go to jail for ten years
B. Formal Institutions Governing International Competition: A Focus on Antidumping
1. Dumping: An exporter selling below cost abroad and planning to raise prices after
eliminating local rivals
VI. ATTACK AND COUNTERATTACK
A. An attack is an initial set of actions used to gain competitive advantage
1. It can be in the form of price cuts, advertising campaigns, market entries, and new
product introductions
Chapter 8 Managing Global Competitive Dynamics
B. Counterattack a set of actions in response to an attack
C. Three Main Types of Attack
3. Gambit: A move that sacrifices a low-value piece in order to capture a high-value
piece
D. Awareness, Motivation, and Capabilities
1. If an attack is so subtle that rivals are not aware of it, then the attacker’s objectives
are likely to be attained
VII. COOPERATION AND SIGNALING
A. Firms choose to either compete or cooperate
B. In order to reduce competitive intensity, they resort to signaling
C. Four means of signaling:
1. Firms enter new markets not to challenge incumbents but to seek mutual forbearance
2. Firms can send an open signal for a truce
VIII. LOCAL FIRMS VERSUS MULTINATIONAL ENTERPRISES
A. Depending on the industry competitions and the nature of competitive assets, local
firms can adopt one of the four strategic postures when competing with multinationals
1. Defender: In some industries, the pressures to globalize are relatively low and local
firms’ strength lie in a deep understanding of local markets
IX. DEBATES AND EXTENSIONS
A. Strategy versus IO Economics and Antitrust Policy
1. Managers deploy strategy to lead their firms to win in the marketplace
2. Antitrust officials influenced by IO economics sometimes accuse firms of being
“anticompetitive”
3. Managers are usually unfamiliar with antitrust policies and antitrust officials are
unfamiliar with business practices
Chapter 8 Managing Global Competitive Dynamics
B. Competition versus Antidumping
1. Two arguments exist against the practice of imposing antidumping restrictions on
foreign firms
a. Since dumping centers on selling “below cost” it is often difficult (if not
impossible) to prove the case
b. The act of foreign firms selling below cost can be perceived as a
hypercompetitive action
3. One solution is to phase out antidumping laws and use the same standards against
domestic predatory pricing
X. THE SAVVY STRATEGIST
A. Capitalism, according to Joseph Schumpeter, is about “creative destruction”; then the
“strategy as action” perspective highlights the power of creative destruction
B. First, you need to thoroughly understand the nature of your industry that may
facilitate competition or cooperation
C. Second, you and your firm need to strengthen capabilities that more effectively
Chapter 8 Managing Global Competitive Dynamics
CHAPTER EIGHT – LECTURE NOTES AND TEACHING TIPS
SUMMARY OF THE OPENING CASE: Emerging Markets: Emirates Airlines Fights
Legacy Airlines
The opening case looks at the emergence of Emirates Airlines as a “super–connector” airline
and the competition it is giving older legacy airlines on profitable long-haul routes.
Teaching Tip: Ask students what advantages Emirates Airlines might have over the legacy
airlines and how Emirates has worked to differentiate itself from those airlines. How does
serving large but secondary cities work with that strategy?
STRATEGY AS ACTION
In essence, the “strategy as action” perspective suggests that a key to strategy is interaction,
in which actions and responses can yield competitive advantage. Firms, like militaries, often
compete aggressively—note the expressly military tone of terms such as “attacks,”
“counterattacks,” and “price wars.” In some ways, business is like war, but military principles
INDUSTRY-BASED CONSIDERATIONS
Industry-based considerations first focus on the nature of collusion, followed by a discussion
of the relationship between industry structures and a firm’s propensity to collude as opposed
to competing.
Collusion and Prisoners’ Dilemma
Industry-based considerations are fundamentally concerned with the very first of the Porter
five forces, interfirm rivalry. Issues associated with entry barriers for entrants with similar
products and with substitute products, the other two of the five forces, also figure
prominently (see Chapter 2 for more discussion on interfirm rivalry).
Most firms in an industry, if given a choice, would probably prefer a reduced level of
competition. “People of the same trade seldom meet together, even for merriment and
diversion,” wrote Adam Smith in The Wealth of Nations (1776), “but their conversation often
ends in a conspiracy against the public.” In modern terms, this means that competing firms in
an industry may have an incentive to engage in collusion, defined as collective attempts to
reduce competition.
Chapter 8 Managing Global Competitive Dynamics
Given the benefits of collusion and incentives to cheat, what industries are conducive for
collusion vis-à-vis competition? Eight factors emerge as listed below.
Concentration ratio
Industry price leader
Homogeneous products
Stability of demand, supply, and technology
High-frequency, low-value orders
Friendly social relationships among rival managers
High entry barriers
RESOURCE-BASED CONSIDERATIONS
Value
Firm resources must create value when engaging in strategic actions. For example, the
capability to attack in multiple markets—as Gillette did when it launched its Sensor razors in
twenty-three countries simultaneously—throws rivals off balance, thus adding value.
Rarity
Either by nature or nurture (or both), certain assets are very rare, thus generating significant
advantage. Singapore Airlines, in addition to claiming one of the best locations connecting
Europe/Indian Ocean Basin and East Asia/Australia as its home base, has often been rated as
the world’s best airline.
Imitability
Most rivals watch each other and probably have a fairly comprehensive (although not
Organization
Whether opting for competition or cooperation, firms need to be organizationally prepared to
engage in desirable actions. Some firms are better organized for competitive actions, such as
stealth attacks, rapid responses, and willingness to answer challenges “tit-for-tat.” This
intensely competitive, “warrior–like” culture not only requires top management commitment,
Resource Similarity
Resource similarity is defined as “the extent to which a given competitor possesses strategic
endowment comparable, in terms of both type and amount, to those of the focal firm.” Firms
that have a high degree of resource similarity are likely to have similar strengths and
Chapter 8 Managing Global Competitive Dynamics
Combining resource similarity and market commonality (discussed earlier) yields a
competitor analysis framework for any pair of rivals.
INSTITUTION-BASED CONSIDERATIONS
Despite the importance of institutions (Chapter 4), strikingly, the existing global (or
otherwise successful firms (such as Microsoft) in trouble.
Formal Institutions Governing Domestic Competition
These institutions are broadly labeled as competition policy, which determines the
institutional mix of competition and cooperation that gives rise to the market system.
Teaching Tip: Concerning competitive policy and antitrust, ask students to respond to a well-
known statement about U.S. competitive and antitrust policy: “U.S. antitrust laws are
designed to preserve competition, not competitors.” What implications does this statement
have for antitrust laws? How about for industrial or trade policy?
Competition/antitrust policy focuses on collusive price setting, predatory pricing, and
extraterritoriality. First, collusive price setting refers to monopolists or collusion parties
setting prices at a level higher than the competitive level.
Teaching Tip: Ask students to consider the extension of U.S. law (or any country’s law)
outside of its borders. Most students will say that this is not reasonable for any country to do.
Foreign critics make two key points. First, U.S. policy, despite its pro-competition ideology,
may be actually mercantilist (seeking to advance U.S. interests at the expense of foreign
rivals). They point out that U.S. law permits export cartels (see the next section on “Formal
Institutions Governing International Competition”). Second, U.S. policy itself is in flux and
seems more permissive recently. U.S. legal scholars counter that if firms want to sell inside
the United States, they must follow U.S. laws on competition, price fixing, and the like. For
example, bribing a buyer into giving their firm a contract would not be allowed, even if such
bribery were legal in their home country. Sometimes firms agree to follow U.S. laws on a
contract, even when they are both doing business in Taiwan and neither firm is from the U.S.
Thus U.S. laws are applied to firms operating outside of United States jurisdiction.
Chapter 8 Managing Global Competitive Dynamics
Formal Institutions Governing International Competition: A Focus on Antidumping
These are primarily concerned with international trade/antidumping and secondarily with
export cartels. In the same spirit of predatory pricing, dumping is defined as (1) an exporter
selling below cost abroad and (2) planning to raise prices after eliminating local rivals.
Interestingly, while domestic predation is usually labeled “anticompetitive,” cross-border
dumping is often emotionally accused to be “unfair.”
Consider the following two scenarios:
Now in the second scenario, the “invading” firm is not from Indiana, but India. Holding
everything else constant, Texas steel firms can argue that the Indian firm is dumping, causing
“material injury” in the form of lost sales, profits, and jobs. Under U.S. antidumping laws,
Texas steel producers “would almost certainly obtain legal relief on the very same facts that
would not support an antitrust claim, let alone antitrust relief.” Note that imposing
antidumping duties on Indian steel imports reduces the incentive for Texas firms to
counterattack by entering India, resulting in higher prices in both Texas and India, where
consumers are hurt.
ATTACK AND COUNTERATTACK
In the form of price cuts, advertising campaigns, market entries, and new product
introductions, attack can be defined as an initial set of actions to gain competitive advantage,
and counterattack is consequently defined as a set of actions in response to attacks.
Three Main Types of Attack: Thrust, Feint, and Gambit
Thrust is the classic frontal attack with brute force. For example, in 2008, HTC launched the
world’s first smartphone powered by Google’s Android operating system. Such a thrust made
HTC in 2011 the largest smartphone vendor in the United States, with a 25% market share,
ahead of Apple iPhone’s 20% and Blackberry’s 9%.
Chapter 8 Managing Global Competitive Dynamics
States (Y), annually sold 500 billion cigarettes and experienced a 15 percent decline over the
previous decade. Both were interested in the emerging Central and Eastern Europe (CEE)
market (X), whose total demand was 700 billion cigarettes and growing rapidly. Philip
Morris executed a feint in the United States by dropping the price of its flagship brand,
Marlboro, by 20 percent on one day (April 2, 1993, which became known as “Marlboro
Friday”). To RJR, this move, full of ferocity and suddenness, appeared to be a frontal thrust.
RJR consequently diverted substantial resources, which were originally earmarked for use in
the CEE market, to defend its U.S. market. RJR thus left the CEE market wide open and
Awareness, Motivation, and Capabilities
Attacks that are unopposed are more likely to be successful. The attacking firm’s
performance is more likely to be improved. Therefore, attackers need to be aware of what
drives counterattacks and consequently attempt to minimize the chances of counterattacks. In
general, there are three drivers of counterattacks: (1) awareness, (2) motivation, and (3)
capabilities.
First, awareness is generally considered a prerequisite for any counterattack. If an attack is so
subtle that rivals are not aware of it, then the attacker’s objectives are likely to be attained.
Awareness usually increases with a high degree of market commonality and resource
similarity.
Teaching Tip: In the 1980s, Burger King switched from its traditional lean and hungry
approach to competing with McDonald’s whereby it had emphasized its differences with
McDonald’s, to one that emphasized speed; after all this is fast food, they argued. Research
later revealed these late 1980s campaigns were a failure. One reason for this was Burger
King’s emphasis on speed reminded customers of the importance of fast food being served
fast, and predictably went to the perceived leader in that attribute—McDonald’s. After
several similar questionable ad campaigns, Burger King went into a long tailspin, which they
took years to pull out of.
COOPERATION AND SIGNALING
What motivates some firms to cooperate whereas others opt to fight? This section deals with
informal cooperation with competitors for the purposes of reducing competitive intensity,
some of which may not be cleared by competition authorities.
Chapter 8 Managing Global Competitive Dynamics
Signaling
Short of illegally talking directly to competitors about reduced rivalry, firms must resort to
signaling—that is, “While you can’t talk to your competitors on pricing, you can always wink
at them.” We outline four means of such winking:
Truce seeking: Firms can send a signal for a truce, such as announcing a price increase in the
middle of a price war. Because a protracted price war hurts the profits of all rivals, others
often follow.
Communication via governments: Sometimes firms can send a signal to rivals by enlisting
the help of government restrictions. Because direct negotiations with rivals on what
constitutes “fair” pricing is illegal, holding such discussions, including some exchanges of
highly proprietary cost and pricing data, is legal under the auspices of government
investigations.
Teaching Tip: During the trench warfare on the Western Front in World War I (ably depicted
by the classic 1930 film, All Quiet on the Western Front), snipers on both the German and
Allied sides would signal each other that they were in each others’ sights. For example, the
Germans would do this by shooting out a pattern on a wall or some other structure just behind
the front trench line. The French and British snipers would respond by shooting out a similar
pattern on the German side. This signaled each side to be careful that they were in sniper
range and to not make any provocative moves. Game theorists call this a “tit-for-tat game,”
which is thought to be a very stable approach to bargaining. The snipers were basically
signaling to each other, “If you don’t shoot us, we won’t shoot you; let’s not do any more
shooting than is necessary.” Firms in highly competitive industries such as the airline
industry often use a similar approach such as using small price increases to signal their intent
to avoid a price war if their competitors will do the same and not defect from that genteel
strategy.
LOCAL FIRMS VERSUS MULTINATIONAL ENTERPRISES
While strategists, students, and journalists are often fascinated by MNE rivals such as Coca-
Cola and Pepsi, GM and Toyota, and SAP and Oracle, much less is written and known about
how local firms cope. This is especially crucial for local firms in emerging economies, which
typically cannot match the expertise, experience, and endowments of MNEs. However, local
firms are not necessarily sitting ducks.
Defender
Chapter 8 Managing Global Competitive Dynamics
turned to focus on products suited to the Middle Eastern climate and managed to defend their
turf. Ahava has been particularly successful, partly because of its highly unique components
extracted from the Dead Sea that MNEs cannot find elsewhere. In other words, while local
firms such as Ahava cede some markets (such as mainstream cosmetics) to MNEs, they build
strongholds in narrower but deeper product markets (such as the “Dead Sea mud”). In other
words, this is an example of gambit.
Extender
In some industries where pressures for globalization are relatively low, local firms may
possess some skills and assets that are transferable overseas, thus leading to an extender
strategy. This strategy centers on leveraging home-grown competencies abroad by expanding
into similar markets. For instance, Asian Paints controls 40% of the house paint market in
Dodger
Sometimes competitive assets based on a superior understanding of local markets are not
enough, especially with very large competitors entering your market very aggressively.
Consequently, a dodger strategy may be necessary. This is largely centered on cooperating
through joint ventures (JVs) with MNEs, sell offs to MNEs, and/or becoming MNE suppliers
and service providers. In the Chinese automobile industry, all major local automakers have
entered JVs with MNEs in the Czech Republic; Skoda, the leading state-owned automaker,
was sold by the government to Volkswagen.
Contender
These local firms engage in rapid learning to approach the capabilities of the MNEs and then
expand overseas. For example, a number of Chinese cellular phone makers, such as TCL and
Bird, have rapidly caught up with global heavyweights, such as Motorola and Nokia.
DEBATES AND EXTENSIONS
Strategy versus Industrial Organization (IO) Economics and Antitrust Policy
This debate is between strategy and IO economics and its public policy brainchild,
competition/antitrust policy. Modern ideas of strategy, pioneered by Michael Porter, have
Chapter 8 Managing Global Competitive Dynamics
Overall, strategists argue that monopolization, feared in nineteenth century America, is not
likely in most industries in the global economy of the twenty-first century. This view,
however, has not yet been fully accepted by antitrust policymakers. Thus, strategists in both
practice and academia need to make their case more vocally.
Competition versus Antidumping
In international business, there are two arguments against antidumping. First, because
dumping centers on selling “below cost,” it is often difficult (if not impossible) to prove the
case given the ambiguity concerning “cost.” The second argument is that if foreign firms are
indeed selling below cost, so what? This is simply a (hyper) competitive action. When
entering a new market, virtually all firms lose money on day one (and often year one). Until
some point in the future when the firm breaks even, it will lose money because it sells below
cost. Domestically, there are numerous cases of such dumping, which are perfectly legal. For
example, we all receive coupons in the mail offering free or cheap goods. Of course, a classic
argument is: What if, through “unfair” dumping, foreign rivals drive out local firms and then
jack up prices? The answer is similar to the answer to the predatory pricing charge in a
domestic setting. Given the competitive nature of most industries, it is often difficult (if not
impossible) to eliminate all rivals and then recoup dumping losses by charging higher
THE SAVVY STRATEGIST
If capitalism, according to Joseph Schumpeter, is about “creative destruction,” then the
“strategy as action” perspective highlights how such power of creative destruction is
unleashed in the marketplace. Consequently, three implications for action emerge for the
savvy strategist. First, you need to thoroughly understand the nature of your industry, which
may facilitate competition or cooperation. Second, you and your firm need to strengthen
capabilities to compete and/or cooperate more effectively. In attacks and counterattacks,
subtlety, frequency, complexity, and unpredictability are helpful. In cooperation, market
similarity and mutual forbearance may be better. Third, you need to understand the rules of
the game governing competition around the world.
Chapter 8 Managing Global Competitive Dynamics
POSSIBLE ANSWERS TO CRITICAL DISCUSSION QUESTIONS
1. ON ETHICS: As a CEO, you feel the price war in your industry is killing profits for all
firms. However, you have been warned by corporate lawyers not to openly discuss
pricing with rivals, whom you know personally (you went to school with them). How
would you signal your intentions?
Answers may vary. It may be possible to make a small increase in price; provided it is
2. ON ETHICS: As a CEO, you are concerned that your firm and the industry in your
country are being devastated by foreign imports. Trade lawyers suggest that you file an
antidumping case against leading foreign rivals and assure you a win. Would you file an
antidumping case or not? Why?
3. ON ETHICS: As part of a feint attack, your firm (firm A) announces that in the next
year, it intends to enter country X where the competitor (firm B) is very strong. Your
firm’s real intention is to march into country Y where B is very weak. There is actually no
plan to enter X. However, in the process of intentionally trying to “fool” B, customers,
suppliers, investors, and the media are also being inadvertently misled. What are the
ethical dilemmas here? Do the pros of this action outweigh its cons?
For a feint to work, three conditions have to be met: First, A’s attack on country X must
capture B’s attention; second, country X must be of considerable importance to B; third,
TOPICS FOR EXPANDED PROJECTS
1. Find some competitive moves made by some emerging multinationals from emerging
economies. How do the two frameworks in Figures 8.4 and 8.9 help you understand these
moves?
Chapter 8 Managing Global Competitive Dynamics
2. If your country has competition/antitrust laws, find a landmark case, and explain whether
you support the plaintiff or the defendant. If your country does not have
competition/antitrust laws, explain why.
Answers might vary. For example, China has an anti-dumping statute which became
3. ON ETHICS: As a party not directly involved in the (second) United States v. AT&T case
(in 2011, during which the U.S. government blocked AT&T’s proposed merger of T–
Mobile), such as a manager at another firm or a student, what do you think is right about
antitrust policy? What is wrong about antitrust policy? Why?
Chapter 8 Managing Global Competitive Dynamics