All entries for May 2008

May 31, 2008

ENVC exercise 5

Lesson 7 explores the concepts of Intellectual Property Rights and Competition Law. This blog will analyse the introduction of a new product from the anticompetitive practises perspective, describing what the business can and cannot do in this context and on the other hand assuming that the company have already taken all the necessary measures to assure that the R&D investment is protected by intellectual property rights.

The aim of bringing a new product to the market is to seek a competitive advantage against the competition. However, this competitive advantage cannot be excessive to a point where it is detrimental to welfare (in example creating a monopoly). In other words, the business have to work towards defeating their competitors but have to be careful that the “intensity” of this practice doesn’t conflict with the existing competition law regulation. This is a clear concept but the frontier for what is legal and not is somehow vague.

As breaching the competition law can be very costly including important fines, the company must be sure that the new product’s strategy doesn’t go against the law. Although in some cases the improved margins obtained by the anticompetitive practices can exceed the fines (10% of revenue) and someone might think that the risk is worth taking, there are other penalties that the company might incur, including deep scrutiny of all aspects of the firm’s strategies or even jail for the executives involved in the practice.

In order to avoid these harmful consequences, we must take into consideration that in our context, the law prohibits

  • Agreements or practices that restrict free trading and competition
  • Abusive behaviour by a firm dominating a market, or anti-competitive practices that tend to lead to such a dominant position.  

Therefore, we must assure that our strategy does not include any the following unlawful practices:

Price gouging:

The price must be defendable against the ex-ante profits (expected profits). Clearly we want to maximize our profits, accordingly we will want to charge as much as the consumers are willing to pay, specially if there are few alternatives in the market for our product, however we cannot do so if consumer welfare is going to be affected. On the other hand, if the demand is inelastic (a reduction in price is not going to stimulate additional consumption) we still can charge high prices.

Predatory Pricing:

The price cannot be as low as to be considered “predatory pricing” (selling the product at very low price) as this will motivate the authorities to intervene in order to avoid a monopolistic market as other firms that cannot sustain equal or lower prices without losing money, will go out of business, and the new entrants will found unfair entry barriers that will discourage them to enter the market.

However, it is usually difficult to prove that a drop in prices is due to predatory pricing rather than normal competition, and predatory pricing claims are difficult to prove due to high legal hurdles designed to protect legitimate price competition.

Tying:

We must be sure that the “add on” to the existing product is not considered a tying practice. Here, the company has to be sure that we are not forcing the consumers to buy an undesired good (the base product) in order to purchase a good they actually want (the add on). If this is the case, the company must study a change in the product strategy to sell the add-on and the base product separately.

Carteling:

The law prohibits the cartels (an agreement among firms for example to fix prices). Moreover, in my opinion cartel-administered prices are not an interesting business practice (apart from the fact that it is illegal) for two reasons. First, the above normal prices will attract new entrants to the industry moving the prices back to the competitive levels. Second, the members of the cartel have great incentives to cheat lowering the prices to increase market share, at the expense of other cartel members. So it looks like that cartels are inherently unstable and difficult to maintain.

Refusal to Deal:

We cannot decide to supply only to certain buyers and on the other hand we have to be sure that different prices among firms does not contravene the law.

Monopoly:

Finally, we must be sure that the market share for the product is not as high as can be considered as a monopolistic practice. We have to avoid having so much control over a this product that will determine significantly the terms on which other individuals shall have access to. We have to be sure that economic competition exists in this particular industry and there are substitutes for our product, otherwise it can be considered a monopoly under the existing law.

Sources:

Iandiorio, Joseph, S. (2006), “Intellectual Property” in Burke, Andrew; “Modern Perspectives on Entrepreneurship”, Senate Hall.

A, Burke, K. Mole (2008). The Warwick MBA for IBM: Entrepreneurship and New Venture Creation. Warwick.

http://www.internationalcompetitionnetwork.org/


May 25, 2008

ENVC exercise 2

In lesson 3 the Business Planning concept is introduced describing as long as the PORES analysis, this intends to asses the merit of a business idea and the ways to exploiting it.

In this blog, we will analyse a case in which there is a committee evaluating strategic developments on the basis of business plans which at the same time it is concerned because it could be too risk averse.

Here it is important to note that “strategic development” is a kind of transformational value proposition (Helmer 2005) which is under some degree of uncertainty due to its “uniqueness”.

Uncertainty does not come from the lack of a probability function but from the inability to state it (Savage, 1972). The committee makes “subjective assessments” making use of the information available in the business plan but also using its own knowledge and experience hence revealing a subjective probability function.

That explains why the entrepreneur and the committee can have different views about the inherent risk related to the strategic development, even when they are presented, in theory, with the same information (the business plan).

So risk aversion can derive from the fact that when the business plan lacks explicit knowledge on particular areas, the committee makes use of its own knowledge and experience deriving on different views for the same subject.

We’re proposing to the committee the use of the PORES analysis to evaluate the business opportunity and try to overcome the issue of lack of knowledge previously stated that can derive in an incorrect risk evaluation.

This framework consists on several stages:

1. Identify key assumptions and check its valid ness.

In developing the market plan, the entrepreneur may have used some assumptions that have to be written down to be confronted against the committee’s knowledge and own assumptions.

2. Establish if there is a market for the product or service.

In particular assessing the size and characteristics of the buyers, the competition (including availability of substitutes) and the price the customers are willing to pay.

3. Establish if the entrepreneur has the capability to satisfy the previous market

This explores production, distribution, human resources, financial management..etc.

4. The last step performs a deeper analysis on competition

Among other things, this tries to anticipate the reaction and strategies than other competitors can follow to exploit the same profit opportunity, how the industry will evolve and opportunities for cooperation.

Following the PORES analysis, helps in getting a better view on the feasibility of the new venture. This information is useful for the entrepreneur to reflect on several aspects that he maybe initially he didn’t consider, in this way, the committee can be sure that the entrepreneur has evaluated those aspects thus reducing the inherent risk for the new venture.

On the other hand, the critical information affecting the profitability of the venture is made explicit thus it can be confronted by the committee’s own knowledge and experience, reducing the uncertainty and resulting in a better evaluation of the risk especially when evaluating industries where the committee is not familiar with.

The committee could use PORES by demanding a business plan to have PORE analysis in it or just asking the submitter to answer the questions derived from PORES not included in the original business plan.

Also, the committee could ask the entrepreneur to try to convert uncertainty to risk under several scenarios (in a kind of sensitivity analysis). In example:

Question: how many potential buyers are?

Probability of occurrence

Number of buyers

Impact on ROI

20%

> 100.000 

90%

50%

> 10.000 & < 100.000

30%

30%

< 10.000

-10%

Using stochastic methods, several answers can be combined to evaluate the potential outcomes around the expected return, which correlates to degree of risk.

However, the inherent uncertainty of the new ventures can make this risk assesment difficult to undertake and sometimes innacurate or incorrect, but at least a method that makes use of a lot of common sense can be used to evaluate different proposals under the same framework.

References

A, Burke, K. Mole (2008). The Warwick MBA for IBM: Entrepreneurship and New Venture Creation. Warwick.

H,W.Helmer (2005). A Lecture on Integrating the Treatment of Uncertainty in Strategy, Journal of Strategic Management Education

Savage, L. (1972), The foundations of Statistics, New York, NY: Dover Publications, Inc.


May 24, 2008

Hello

Hello,

This is my first entry on the Entrepreneurship and New Venture Creation blog.

Regards,

Sergio


May 2008

Mo Tu We Th Fr Sa Su
Apr |  Today  | Jun
         1 2 3 4
5 6 7 8 9 10 11
12 13 14 15 16 17 18
19 20 21 22 23 24 25
26 27 28 29 30 31   

Search this blog

Tags

Galleries

Most recent comments

  • Hi Thnnk you. The best advice I was ever given was from a management consultant many years ago. It w… by on this entry
  • Hi John, First of all, many Thanks for your all comments through all the blog. Yes, I've been grante… by on this entry
  • Hi In the example of 'grandfather knows best' in my earlier feedback – it also influences the role o… by on this entry
  • Hi Some of your examples in the Maslow model are more explicit than implicit – but if you think abou… by on this entry
  • Hi As you have applied for an extension (I'm not sure if it has been granted) I have looked your blo… by on this entry

Blog archive

Loading…
Not signed in
Sign in

Powered by BlogBuilder
© MMXXII