Strategic decision and competitive analysis in commodity markets
Strategic decision often understates the impact of competitive dynamics on future value
The definition of an efficient and sustainable strategy relies on the relevance of considered future scenarios with competition market prices, reachable market shares, costs evolution, regulatory issues, innovation etc. Building such scenarios needs a clear perspective on the evolution of market fundamentals and on the potential exogenous risks and opportunities. But it also needs, and here’s the main difficulty, a deep understanding of competitive dynamics and the way they influence competitors moves on the supply side and subsequent price and market shares formation.
Many strategic decisions suffer from a non-accurate vision of competitive dynamics, leading potentially good ideas to prove wrong : industry leaders sacrificing price to gain market share and destroying value, underestimate of investment projects’ strategic value leading to abandon them when they would have contributed to protect future market share and pricing, deter competitors capacity increase and avoid new entries, bad timing for selling assets to best future owner, bad allocation of limited capex enveloppes facing too many projects etc.
Ykems advises C-level executives of industry leaders in the definition of sustainable growth strategies taking into account the impact of competitive dynamics on future value creation. Thanks to its strong historical links with leading experts in Industrial Organization (Imperfect Competition supported by game theory) from the Economics Department of École Polytechnique, YKems has built a unique expertise in quantitative modelling for decision (Strategic gaming, Finance and Operations Research). YKems is therefore one of the only consulting firms developing tailor made tools to build pragmatic, auditable and fact-based recommendations (competition dynamics modeling, financial tools, optimization).
YKems has developed a unique methodology and a set of tailor made quantitative tools to address commodity industries strategic issues
All commodity products present similar key characteristics determining the nature of competition on markets and price formation mechanisms: quite standardized products, inelastic demand for a large range of prices, high capital intensity resulting in barriers to entry, high price war risks (especially in over capacitated situations, when players desperately seek to maintain high Utilization Rates to cover their high fixed costs…).
Therefore, defining one player’s strategy in such markets can be described as a two steps competitive game combining:
- Capacity investment/divestment competition:
- In growing markets, how to preempt growth while dissuading competitors’ projects (or new entries)?
- Conversely, in declining markets, how to induce restructuring via capacity closures avoiding “free-rider” behaviors?
- For given capacities (in the short to mid-term), competition based on price vs volumes trade-offs :
- How to define the most profitable sales target (volumes and price arbitrages) while preventing undesired entries in attractive markets that would be triggered by too high prices, as well as avoiding useless price erosion?
- How to behave when facing an unexpected demand drop in a long term growing market ?
In both cases, supply/demand balance and growth trends as well as industry structure (players’ competitiveness, concentration level, vertical integration structure…) are key drivers of competition regimes.
Specifically designed to fit the characteristics of competition on commodity markets, our set of SVATM proprietary tools & methods allows assessing and comparing the strategic options of industrial groups on a quantified basis, whatever the market configuration and the competitive context may be:
- Computation of expected deserved market shares per player and related price ranges per market according to competitive regime (SVA algorithms are derived from imperfect competition models renewing the classical industry cost curve approach), supply/demand balance and relative competitiveness of players (see also appendix for some illustrations on standard outputs) (see appendix);
- Understanding and anticipation of each player’s moves according to their feasible options and expected profitability;
- Identification and rating of our client’s best strategic options to change the game to its advantage.
Model competitive dynamics with SVATM : inputs and illustrative outputs
Beyond strategic decision making aid, our methodology and tools offer a tailor made support to involve our clients’ teams in strategic thinking through multiplayers negotiation games mimicking real market issues. Those games allow to build a shared vision of strategic decisions across the organization, leading to:
- A common understanding of competitors’ behavior and rationale,
- A better alignment of short term policies (pricing policy and commercial negotiations, industrial optimization, financial issues) and long term targets