Sunday, April 1, 2012

Competition Demystified: Chapter 14

The author of the excellent book for beginners, Value Investing: From Graham to Buffett..., is back, this time with a book about how to understand and analyze competitive advantages. Investors interested in better understanding what gives a company a competitive advantage must give this book a read.

Having discussed strategies for firms to deal with aggressive entrants, the authors now turn to a fully cooperative scenario and discuss how the firms should divide the spoils. The first step in this process is ascertaining what the maximum spoils are under a joint strategy of full (legal) cooperation.

Under such a cooperative scenario, firms ideally compete in different niches, either geographic or product. There is no overlap in their spending (e.g. R&D) scopes, as this would be a waste; only one firm need spend in any one area.

Following this, firms should divide the profits up using the following "fairness" principles:

1) No firm should receive less in cooperation than it could in a non-cooperative setting
2) If the firms are complementary suppliers along a value chain, the benefits of cooperation should be divided equally among the firms with advantages
3) If the firms are competing horizontally, the benefits should be divided proportionate to the relative economic positions of the firms

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