Can you solve this puzzle? You work as Equity Analyst for X-corp. One of the companies you cover in the internet media industry has seen declining sales (and not at least a declining share price!) over the past year, as a result of a new competitor entering their market. The competitor is heavily (private-equity) funded and seems to have a bottomless war chest full of money. They can therefore offer their product at a lower price than others, AND at a better quality. As a result, they are rapidly gaining market share and seems on their way to dominate the market. They are however not profitable (yet), but its belived they will at some point raise the price of their goods when the have a larger share of the market. Question: How should one compete against this beast? What would your recommendation be to the CEO of the internet company - how should they position themselves?
If I’m not SMART, does that mean I’m not allowed to answer the question?
Anyone may answer! 
I am not sure how much you expect given the brief information you have given. That said - just the fact that your competitor has more resources does not mean automatic competitive advantage(You may recall Google is a recent start up, Microsoft was still around when they began their business). But it requires hard and smart strategic decisions. If they could make sound strategic decisions, which have a foundation on the long-term direction of the organization and within the scope of the organizations activities, then they could aim at gaining advantage over competitors. With this, I am thinking of first recognizing their current predicament, whether their vision is focused and cohesive and how to solve their problems. Do they need a radical reorganization? How is their current business unit structure organized? Do they need to reduce headcount? I would also imagine in lieu of the competition they should also address changes in the competitive and business environment, by building on their strategic capability. My two cents.
This sounds like homework
There is not nearly enough information to provide a proper answer. If I were an equity analyst, I would spend more time analyzing and less time providing recommendations to mgmt. One thing I know is that firms rarely are able to “raise prices later.” That doesn’t mean they will learn how to operate their business more efficiently and expand margins. The way you phrase it, the company you’re analyzing has a more expensive, shoddier product. Either that company needs to raise cash and pursue a new strategy (like focus strictly on improving quality, or strictly on reducing costs, but it depends on what kind of product/market it is), try to get purchased by another firm with deeper pockets, or shut it down when they no longer make enough money.
Lots of companies have done this before, like Microsoft (XBox) and Toyota (Prius). The difference of course, is that these projects were funded by huge parent companies, not private equity. If you are a small company trying to compete with these guys in the exact same market niche, you’re out of luck. The best you can do is come up with a highly differentiated or novel product. Tesla is an example of a company that has done this.
Level II can help here. the five forces that shape industry competion are there is rivalry among existing competitors, threat of new entrants, bargaining power of suppiers, bargaining power of buyers and threat of substitute products/services Powerful suppliers can squeeze profitability out of an industry that is unable to pass on cost increases on its own prices. powerful labor unions for example can demand wage concessions whenever labor contracts are renewed. this is especially likely if the supplier group is more concentrated than the industry it sells to. the supplier group is not heavily dependent on the industry it sells to for a majority of its revenue. industry participants face high switching costs and/or the suppliers product is unique. the supplier group can threaten to enter the industry. powerful buyers can depress prices, raise quality and demand more. walmart is able to demand higher quality at lower costs from its supplier just from its sheer scale. i am not going to go into any more detail becasue i think you get the point. read the Level II equity book. its all there.
ValueAddict Wrote: ------------------------------------------------------- > This sounds like homework That’s exactly what I said as I read through it. Do your own homework “banker”.
hire a lawyer
Porter would say DIFFERENTIATE, this could mean seeking and developing a niche. Cost competition is not sustainable whereas differentiation is, in addition, multiple competitors can pursue the differentiation strategy without destroying the industry.
Since the competitor has “bottomless war chest full of money” and isn’t profitable yet, as an equity analyst I would recommend the CEO to buy the crap out of his own company’s stock then sell the operation to that “beast” at a very high valuation. Then I would recommend him to take his money and buy an NBA team in Texas and live like a douche for the rest of his life.
- Watch Duplicity 2) Reenact 3) Take over world 4) ??? 5) Profit!
Game theory may help in this question. The company should stick with current pricing and wait for the competitor to go bankrupt or increase price
Wouldn’t this be considered predatory pricing and would attract the attention of the fed http://en.wikipedia.org/wiki/Predatory_pricing
Predatory pricing requires that they’re pricing below the profit point, however, in your original question it only states they are undercutting the competitors. These are totally different. Also, predatory pricing is very difficult to prove and rarely a successfully executed prosecution. Lastly, you don’t want to build your company’s strategy and future upon the undetermined actions and timing of the FTC. Very Cool, that does not work when the competitor has the larger war chest. Because while they are undercutting you with a superior product you will be getting crushed by fixed cost. Plus, if you’re going to recommend game theory you should probably recommend a model rather than a catchphrase. Most likely it will be you that goes bankrupt first, hence their strategy. Even if you don’t go chapter 7 on their @ss, they may win over clients by making it economically attractive to eat any known switching costs. To be honest, what worries me here the most is the nuance that states they sell better product more than the price. Quality is a sustainable advantage and will build customer goodwill. This firm needs to match on quality and begin to differentiate to exploit niches. In summary, this situation basically represents the Japanese and domestic auto manufacturer struggle of the 90’s and new millenium. Obviously, that didn’t turn out will for the guys that took no action. The domestics failed to respond to both quality and market demands. Both of these may be countered by what I recommended. Quality improvement combined with extensive niche demand research and response.
Black Swan Wrote: ------------------------------------------------------- > Predatory pricing requires that they’re pricing > below the profit point, however, in your original > question it only states they are undercutting the > competitors. These are totally different. Also, > predatory pricing is very difficult to prove and > rarely a successfully executed prosecution. > Lastly, you don’t want to build your company’s > strategy and future upon the undetermined actions > and timing of the FTC. > > Very Cool, that does not work when the competitor > has the larger war chest. Because while they are > undercutting you with a superior product you will > be getting crushed by fixed cost. Plus, if you’re > going to recommend game theory you should probably > recommend a model rather than a catchphrase. Most > likely it will be you that goes bankrupt first, > hence their strategy. Even if you don’t go > chapter 7 on their @ss, they may win over clients > by making it economically attractive to eat any > known switching costs. To be honest, what worries > me here the most is the nuance that states they > sell better product more than the price. Quality > is a sustainable advantage and will build customer > goodwill. This firm needs to match on quality and > begin to differentiate to exploit niches. > > In summary, this situation basically represents > the Japanese and domestic auto manufacturer > struggle of the 90’s and new millenium. > Obviously, that didn’t turn out will for the guys > that took no action. The domestics failed to > respond to both quality and market demands. Both > of these may be countered by what I recommended. > Quality improvement combined with extensive niche > demand research and response. yup…it smells like the Toyota Previa case…that is why I recommend hiring a lawyer. If its a foreign manufacturer, then you have anti-dumping protection, if its in the US you have Anti-trust legislation. The fact that their product is superior and cheaper nullifies other strategies. I guess you could focus on a niche, but that would be settling for a smaller market share and who is not to say, that the competitor won’t go after your niche.
brianr Wrote: ------------------------------------------------------- > ValueAddict Wrote: > -------------------------------------------------- > ----- > > This sounds like homework > > That’s exactly what I said as I read through it. > > Do your own homework “banker”. +1
Any of you study Christensen’s works on management strategy?
Come on people. Just undercut them on the price and make it up on the volume! Venture Capital 101.