Using Evolutionary Game Theory to Deter Competitor Market Entry

Companies that innovate lead the market but often attract market chasers that seek to gain financial benefits of producing similar products. For organizations that have invented new products and services this can be an annoying aspect of doing business if high profits must now be shared with other market entry companies. To avoid easy access by competitors a company may desire to use a deterrence or shakeout strategy.

A study in the Journal of Academy of Marketing Science discusses how evolutionary game theory is used to understand whether a deterrence strategy and a shakeout strategy are more successful in keeping new businesses of out the market (Homburg, et. al, 2013). The method a company uses will determine whether or not they will be effective in ensure the costs are too high for other firms to pursue.

A deterrence strategy seeks to block potential competitors from entering the market. Strategies may include limit pricing, raising switching costs, new innovations, blocking access to suppliers and sales channels. Through this method the organization seeks to lock up the potential cost effective methods of conducting even before the new company moves into the market.

Shakeout strategy seeks to squeeze out competitors once they have entered the market. This strategy use predatory pricing, luring customers with deals, comparative advertising, soaking up market share and other methods that leave the market unprofitable for the competitor. When this occurs over time the competitor may opt to move out of the market and adjust their investment strategies. 

The shakeout strategy appeared to be more cost effective by helping to ensure that company expenses once entering the market are high and their profit margins lower. This effectiveness is based on the optimal costing strategy of comparative effectiveness of the two strategies. The use of deterrence is still a solid strategy but only under circumstances where maneuvers can create cost effectiveness. 

Homburg, C. et. al. (2013). Incumbents’ defense strategies: a comparison of deterrence and shakeout strategy based on evolutionary game theory. Journal of the Academy of Marketing Science, 41 (2).

Aligning Organizational Strategies to Market Needs

Corporate competitiveness is a process that requires continually adjustment to the market to increase efficiency and effectiveness. A paper by Bhattachariya and Gibbons (1996), discusses in further depth how this environmental alignment can be achieved. By ensuring organizations are structured in a way that improves competitiveness, they can also help secure a place in the global economy.

Greater internationalization, consumer choice, fragmented markets, and short product cycles are some of the challenges organizations face.  Companies increasingly are forced to change with  environmental demands and are attempting to do this through transformation of their structure. A proper transformation should align the organization and everything within it to corporate strategies that match the market environment.

Two primary constraints influence businesses, which include the external environment and a level of performance that is sufficient to deal with that environment. To find the balance means one must find a strategy that positions the organization into a competitive stance. That strategy is a way to achieve an objective; it is a path to a goal.

The external environment is the environment, which the organization is currently working. It may be global in nature, could include the local labor market, or focus on regulatory environments. It is all of the pressures and factors found through a proper environmental scan. The performance level of the organization should be able to compete effectively in that market if there is to be success.

 The entire structure should be aligned to the environmental needs. This requires the ability to ensure processes and procedures are fulfilling the organizations functions. If these processes and procedures do not fulfill a competitive need or are not aligned to the market, then it is necessary to reduce them as waste.

Success can come through creating number of adjustments within the layers of structure and the alignment of related processes. This includes the strategy, the business unit strategies, the functional strategies, processes, and competencies/capabilities. The business unit strategies take into consideration actual functional aspects of the firm. This includes marketing, financial, purchasing, and manufacturing, etc…

Each strategy should focus on what the organization does well. If innovation is a core competency, all processes and procedures should align to the environment in a way that further enhances these abilities. For example, innovation would require a level of experimentation, collaboration, flatter organizational structure, and open-minded management, and constant communication. The organization should seek to develop processes and procedures that enhance this innovation to compete in an environment with lower product cycle times and competitive offerings.

The author does not discuss cognitive processes. As processes and procedures are learned employees naturally begin to change the way they think about proper work functions. The longer such processes and procedures are used the more they become embedded within the organizational culture and the mindset of the employees. To have a truly transformational change requires the changing of thoughts and behavior.

It is possible to make conclusions about environmental alignment as a process:

-Adjusting organizational strategy to match environmental demands. 

-Adjusting business unit (departmental) strategies to match organizational strategies.

-Create functional strategies that are in alignment with the departmental and corporate strategies.

-Adjust processes to fulfill the functional strategies, departmental strategies and corporate strategies.

-Encourage new employee cognitive and behavioral strategies that match the needs of the processes, functional strategies, departmental strategies, business unit strategies and organizational strategies.

Bhattacharya, A. & Gibbons, A. (1996). Strategy formulation: focusing on core competencies and processes. Business Change & Re-engineering, 3 (1).

Developing Corporate Strategies

As the market becomes chaotic the need to change the strategic formation models becomes apparent to match this need. Strategic behavior is associated with capital resources and the competencies of the corporation. A paper by EL Namiki in the Ivey Business Journal (2013) helps in furthering the Systemic Strategy Analysis Model (SSAM) of strategic thinking which understands the flows of thought formation within companies in order to analyze a company’s competitive position.

Strategic behavior is seen as a process of developing and enacting choices. Systematic strategic behavior focuses more on the developing and enacting of choices that are in alignment with the structural and environmental constraints of an organization. Strategic business choices, by their nature, are more confined than those enacted by individuals. Proper analysis is needed to define corporate strategy.

Where resources and company attributes meet each other there is a strategy that could be developed to full bloom.  When the attributes and resources change there would be a shift in the overall strategic trajectory. The path would adjust based upon the most advantageous route to achieving objectives. It is possible to map these concepts and draw out possible strategies. Consider the following four concepts when developing a strategy: 

Seeking Concentration: 

Concentration relates to the overall concept of market saturation. When a small amount of firms dominate an industry, it is said to have high concentration. If a large amount of entrepreneurial or boutique firms exist within an industry, there is a low level of concentration. The success of achieving a level of market presence will depend on the ability to meet the challenges of the environment based upon competing companies. 

Seeking Competencies:

Competency is a level of strong and competitive performance in a particular domain. It could be anything that furthers a strategy such as distribution, product design, technology, etc… Organizations seeking to enhance a competency either hire the right people or train them with competitive skills. Successful firms like Google have attracted the right talent to further their strategic competencies.

Seeking Focus:

At times it is necessary for companies to narrow down their efforts and focus on core offerings in order to enhance those things they excel in and remove activities they do not excel in. This may mean selling off brands that do not enhance core competencies or outsourcing internal functions that distract from the core strategy. Improving upon core competencies creates higher levels of competitive advantage. 

End Game:

When a company has maximized profits and a period of low profits sets into product lines or services they should consider an end game. This end game occurs when competitive offerings decline and there is little hope of recovery or the products have lost their market luster. Generally, this is a result of root misalignment between the offerings and current market needs. A strategy should include when to get out of the market and move onto new products and services. 

El Namaki, S. (2013). Strategic thinking for turbulent times. Ivey Business Journal, 77 (4).