The use of predatory tactics to prevent competitor entry: A case study of IKEA

Chapter 1
1.0 Introduction
In this chapter, the researcher will present the background reasons why this research subject was chosen. Besides, the research questions and purpose of the dissertation are declared. Finally, the delimitation of my empirical study is clarified in order to narrow the research scope.

1.1 Background
The IKEA Concept is based on offering a wide range of well designed, functional home furnishing products at prices so low that as many people as possible will be able to afford them. Rather than selling expensive home furnishings that only a few can buy, the IKEA Concept makes it possible to serve the many by providing low-priced products that contribute to helping more people live a better life at home. The IKEA Concept guides the way IKEA products are designed, manufactured, transported, sold and assembled. All of these factors contribute to transforming the IKEA Concept into a reality. In the booklet “the future is filled with opportunities”, Ingvar Kamprad, the founder of IKEA, says that:” IKEA does not just want to win your brain. IKEA also wants to win your heart.” No matter whom you are, formal education or informal education, a worker or a manager, you can find IKEA is a place which is full of opportunities. “It is up to you” is a common expression in IKEA. (Salzer, 1994)
IKEA starts the furniture business in the 1940s. From a small company become to a world famous transnational corporation, the development speed of IKEA is very fast. According to the “IKEA at a glance- financial year 2009”, the IKEA trademark represents the leading home furnishings brand in the world with more than 300 stores in more than 35 countries, more than 15,000 co-workers and 46 production units. They sold totalled 21.5 billion Euros at 2009. (http://www.ikea.com/ms/en_US/about_ikea/pdf/FF09_GB.pdf, 2011-1-20). How does IKEA develop quickly and keep strong competition in the furniture industryThat makes the researcher have strong interesting view about IKEA. With China join the WTO, more and more foreign companies entered China market. IKEA entered the China market in 1998. Recently the biggest IKEA store in Asia opened in Shenyang. But there are only 12 stores in China now. Compared with other foreign furniture companies, the development speed of IKEA is seems too slow in China. On the other hand, China is already become to the biggest purchasing country which is about 20%. But the sales per region are only 5% in Asia and Australia. What is the problem IKEA have in ChinaWhat should IKEA change in ChinaThe researcher will use theory of competitive advantage to find the reason why IKEA can get the success. The researcher tried to have an interview with the manager of IKEA store to know the situation and the future plan of IKEA. Unfortunately, they did not have time. The researcher tried to connect with the manager of IKEA. Luckily, the logics manager Hans Karlsson gave the researcher a chance to have the interview. So the meeting was held at 2011-2-28. The manager introduced the logics process of IKEA and answered some questions prepared. But the manager could not give the researcher some data. The researcher browsed the website of IKEA, and read many books, journeys, even newspaper report to find the data, the introduction of IKEA model, and the opinions of foreign and Chinese scholar about IKEA. The research of this dissertation contains the history of IKEA in Sweden, the IKEA concept, international expansion periods. Then the researcher find out what IKEA should change in the future to adapt the China market better and remain competitive.
1.2 Research questions
In this thesis, I am going to examine the following issues:
1. What are the characteristics used to investigate how firm like Ikea uses an incentive to use “predatory tactics” to preclude the entry of potential competitors in business economic in china
2. What potential opportunities and the competitive advantage do furniture firm like Ikea have on the Chinese Market?
1.3 Purpose
The purpose of this thesis is to explore how firm like Ikea have an incentive to use “predatory tactics” to preclude the entry of potential competitors in business economic in china.
In order to accomplish this objective, it is necessary to also look into three important issues which are directly related to the subject of export to China, namely, Chinese business culture and export entry modes and the competitive advantages firms has over new comers.
Chapter 2
2.0 Literature Review
2.1Basic Concepts in business Economics
This dissertation involves researching some relevant academic literature, journals with current media, and then aims to examine the benefit of firm to have a predatory tactics to preclude the entry of potential competitors through the application and implementation of business economics.Economic analysis of business strategy, most definitions of economics focus on three issues: consumer wants, resources and choice. According to Lipczynski and Wilson (2004) stated that economic activity exists because of the existence of human wants or demand. These wants are made up, first, of ‘biological’ wants, which refer to the demand for food, clothing and shelter: in effect, the goods necessary for our survival. Second, people display ’cultural’ wants. These refer to our particular taste for goods and service, which is determined by our social and ethnic backgrounds.
Ireland et al (2009, P. 43) mentioned that economical issues refer to the nature and direction of the economy in which a firm competes or may compete. Because nations are interconnected as a result of global economy, firms must scan, monitor, forecast and assess the health of economies outside their host nation. Market in which a company competes, explains that companies must pay close attention to major trends and consumer spending patterns for its products, the competitors, and competition who threaten its, also suppliers on which it depends. On larger scale, if the business plan is not successful and the firm sustains losses. Economic issues are intertwined closely with the realities of the external environments.
According to Porter, it is important for a company to identify its strengths and weaknesses from a strategic viewpoint. Strategy can either be viewed as assembling protection against its competitive forces, or look for positions in the industry where the forces are weak. Knowledge about its competitive forces will lead the company to enter areas where it should deal with competition and where to avoid it. Rumelt supports Porter’s ideas and states that a company’s position is composed of the products it supplies to its customers, as well as the chosen market segment and to what extent it lacks competition or not. Once a company has received a good position, it is defensible. This means that enough value is returned to warrant its continued maintenance, and also that the position would be so costly to capture that the competitors are restrained from doing so. It also means that a position tend to be self-sufficient providing that the underlying factors remains stable.
Recently, marketers have begun to examine firms’ reactions to competitors’ signals regarding future actions often, researchers focus on actions or signals that represent significant departures from competitive norms, for example, deep price cuts or large increases in advertising. Such actions may be termed aggressive if they are motivated by the desire to force rivals to react by taking actions that significantly impair the rivals’ performance or competitive viability. When these actions lead to a reduction in competition and undermine consumer welfare, they may be considered predatory. As Sullivan (1977, p. 111) observes, in contrast to the aggressive competitor, the predator seeks not to win the field by greater efficiency, better services, or lower prices reflective of cost savings or modest profits. The predatory firm tries to inhibit others in ways independent of the predator’s own ability to perform effectively in the market. Its [conduct] is calculated to impose losses on other firms. Predatory tactics is the best known form of predatory behaviour. It involves lowering prices to an unreasonably low (usually below-cost) or unprofitable level in a market in an effort to weaken, eliminate, or block the entry of a rival. While capturing the attention of law and economics scholars and the concern of policy makers, predation and predatory tactics has only recently begun to be addressed by economist in business environment. In most general terms predatory pricing and tactics is defined in economic terms as a price reduction that is profitable only because of added market strength the predators/ firms gains from removing, disciplining or change the competitive position of rival or potential competitors.
Alvin K. Klevorick (1993) explained that a predatory tactics is a price or system that is profit maximizing only because of its exclusionary or other anticompetitive effect. The anticompetitive systems of predatory tactics or pricing are higher prices or reduced.
2.2 Econometrics
Thomas (1997) stated that econometrics is the application of mathematical statistics to economic data to lend appropriate support to the models constructed by mathematical economics and to gain numerical estimates and predations. More succinctly, the main task of econometrics ‘is to put empirical flesh and blood on the theoretical structure’
Johnston (1984) mentioned that economic theory reduces or predict various relationships between variables, e.g. spring easily to mind-a demand curve, a production function, a consumption function. Econometrics involves the coming together of mathematical economics, economic statistics and statistical inference. Mathematical economics express the theories and ideas of economics in mathematical forms. However these mathematical forms are qualitative rather than quantitative, this means that they do not involve numbers. Thomas (1997) discussed that the economic statistics involves the collection and preparation economic data and their expression in readily understandable form. Econometrics takes the equations of mathematical economics and by confronting them with economic data that seeks to use the formulas of statistical inference to give these equations quantitative form. In recent years theorists in marketing, economics, and strategic planning have begun to examine competitive strategies – actions directed toward influencing the behaviour of rival firms and encompassing competitive moves and countermoves between firms (cf. Porter 1980; Weitz 1985).
G.S. Maddala (2004) also quoted that econometrics means “measurement in economics.” This is too broad a definition to be of any use because most economics is concerned with measurement. We measure our gross national product, employment, money supply, export, imports, and price indexes. Econometrics is the application of statistical and mathematical methods to the analysis of economic data, with a purpose giving empirical content to economic theories and verifying them or refuting them. In this respect econometrics is distinguished from mathematical economics, which consists of the application of mathematics only and the theories derived need not necessarily have an empirical content. The behavioural equation: q = a+ b p + u. Where q is quantity demand and p is the price. Here p and q are the observed variables and u is a disturbance term. A specification of the probability distribution of u which says that E (u/p) = 0 and that the values of u for the different observation are independent and normally distributed with mean zero and variance. With these specifications one proceeds to test empirically the law of demand or the hypothesis that B< 0. One can also use the estimated demand function for prediction and policy purpose in a business economical sector.
2.3 The Aims and Methodology of Econometrics
G.S. Maddala (2004) mentioned the following aims of econometric within the business environment.1. Formulation of econometrics models, that is, formulation of economic model in an empirically testable form. Usually, there are several ways of formulating the econometric model from an economic model because firm has to choose the functional form, the specification of stochastic structure of the variables, and so on. This part constitutes the specification aspect of the econometric work.
2. Estimation and testing of these models with observed data. This part constitutes the inference aspect of the econometrics work. And also firm uses these models for prediction tactics on competitor’s entry and policy purpose.
Diagram: The Aims and Methodology of Econometrics for predatory tactics in firm
Source: G.S. Maddala (2004)
2.4 Predatory tactics and pricing
The idea that a firm with market power might try to discourage a competitor by manipulating its expectations was introduced into modern literature of industrial organisation by Milgrom and Roberts (1982), which focus was on the problem associated with the limit of pricing. This idea was also adapted by Kreps and Wilson (1982) to explain the episodes of predatory pricing. By responding aggressively to entry, a predatory may be able to convince that entrant, or other potential entrants, that entry into its markets is unprofitable.
Milgrom and Roberts (1982) discussed that if a firm in an industry with rapid product change might cut prices sharply in answer to new entry in order to discourage the new entrant from continuing an active product development programme. Whether the entry attributes its lack of profitability to its high costs, to weak market demand to overcapacity in the industry or to aggressive behaviour by its competitor, it will properly reduce its estimate of its future profit. If it capital has other good uses, this might lead it to withdraw from industry. If not, it may nevertheless be dissuaded from making new investments in and developing new products for the industry. At the same time other firms may be deterred from entering the industry. If any of these things happens, the predator benefits. Notice that, according to theory, predatory activities do not have to drive the competitor from the market to be successful. And, in contrast with McGee’s theory, if they do succeed in driving a competitor out, new entry will not follow inevitably when the monopolist raises its price to enjoy the fruits of its actions: potential entrants may no longer expect to profit directly from its price-cutting in the contested market in order for predatory pricing to be profitable.
2.5 Philosophy of Competition in Economics
According to Porter (1980), the goal of a strategist and economist is to find a position in the industry where the company can protect itself against the surrounding forces, or might be able to influence them in a positive direction. If a company has knowledge about these surrounding sources of competitive pressure, it will provide the groundwork to decide where to position the company in its industry. Competition in economics is a term that explains the notion of individuals and firms trying to gain greater share of a market to sell or buy goods and services. The aims of competition (anti-trust) laws is to make sure that consumers pays the lowest effective price along with the best quality of the goods and services. This, according to current economic theories, can be gained only through effective competition. Competition not only reduces particular prices of specific goods and services – it also tends to have a deflationary effect by reducing the general price level.
Hartley et al (2009, P. 15) mentioned that in highly competitive markets, keeping an eye on competitors and trying to understand their likely next moves can be crucial. Every business has external peers that perform similar functions within their professional discipline. These peers are considered competitors and they are rival producers of goods or services. Competitors contribute to the overall industry by their ability to deliver goods and services of high calibre at competitive prices.
Nellis & Parker (2006) concluded that an important factor in business economics is determining the behaviour in the nature of the competitive environment in which the firm operates, as all managers are aware , decision-making within the firm is to large extent influenced by the fact that firm needs to operate successfully in the market place in order to survive. Economists break this spectrum down into four discrete models of market structure, namely:
Perfectly competitive markets
Monopolistically competitive markets
Oligopolistic competition
Monopoly

Chapter 3
3.0 Macro-environmental forces