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STRATEGIC COMPETITION, COMPETITIVE ADVANTAGE
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STRATEGIC COMPETITION, COMPETITIVE ADVANTAGE

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  • 1. STRATEGIC COMPETITION, COMPETITIVE ADVANTAGE & GAME THEORY
    • We will look at two facets of ‘game theory’
  • 2. Antecedents
    • Military strategists
    • A branch of mathematics in the inter-war years: John Nash (“A Beautiful Mind”)
    • Post WW2: Nuclear arms RAND (USA)
    • Biology (evolutionary game theory)
    • Economics: bargaining models of wage-price determination
    • Business Strategy
  • 3. First facet: Strategic Competition
    • Strategic thinking is the art of outdoing an adversary knowing that the adversary is trying to outdo you.
    Dixit & Nalebuff: Thinking Strategically, 1991 .
  • 4. Differentiation Hybrid Focussed differentiation Low price No frills Strategies destined for ultimate failure Perceived benefit High Low Perceived price High Low 1 2 3 4 5 6 7 8
  • 5. Perceived benefit High +100 0 -100 Low Price Low High Your Product Your Price (22,000) B X A C Is this sensible?
  • 6. Presumably, it depends on what the others choose to do …..
  • 7. Presumably, it depends on what the others choose to do ….. We will see that where there is a small number of competitors, the “payoff” to you of any choice CANNOT be known in advance; it depends also on what choices others make.
  • 8.
    • As a simple (hypothetical) example, we consider
    • a market with two dominant competitors
    • sell very similar products
    • in hard times, and each is considering whether or not to cut price
    • market demand is sensitive to price, but only to a small degree
  • 9. We assume: Game played just once, and choices simultaneous
  • 10. Me You 0 0 Cut price Stick Cut price Stick
  • 11. Me You 0 0 Cut price Stick Cut price Stick ? ?
  • 12. Me You 0 0 Cut price Stick Cut price Stick - 4 - 4
  • 13. Me You 0 0 Cut price Stick Cut price Stick - 4 - 4 + 7 - 8
  • 14. Me You 0 0 Cut price Stick Cut price Stick - 4 - 4 + 7 - 8 + 7 - 8
  • 15.
      • Form yourself into pairs
      • Game 1: (5 minutes max)
      • Using our payoff matrix each of the individuals in the pair should write his/her name on a post-it note and write ‘Cut’ or ‘Stick’
      • Don’t discuss what you will do with your competitor
      • Don’t let the other person see what choice you make
      • Then swap your two notes with the pair next to you.
  • 16.
    • Dominant strategy for both is CUT PRICE.
    • This is a poor outcome for both firms.
    • There are benefits from co-operation here
    • But cheating may lead to higher benefits.
  • 17.
      • Game 2: (8 minutes max)
      • Using our payoff matrix each of the individuals in the pair should write his/her name on a second note
      • Discuss what you will do with your competitor
      • Agree what you will both do
      • Write that down and let each other see
      • Write down below your agreed choice what you will actually do , without showing it
      • Then swap your two notes with the pair next to you.
  • 18. Many types of games
    • Simultaneous and sequential
    • Once-off and repeating
    • More than two players
    • Various structures of the payoff matrix
    • Dixit and Nalebuff look at many of these and give advice on how best to play the game
  • 19.
    • PLAYING GAMES TO YOUR ADVANTAGE: STRATEGIC MOVES
    • A strategic move is designed to alter other players’ beliefs and actions to make outcomes of games more favourable to you.
    • THREATS AND PROMISES
    • WARNINGS/ASSURANCES
    • COMMITMENTS
  • 20. Cooperation between ‘competitors’
        • profit-maximising cartel (OPEC)
        • entry prevention pricing (limit pricing)
        • price leadership
        • avoidance of price competition: use of non-price competition
        • agree about standards
  • 21.
    • But while co-operation is often beneficial to all parties, cheating may be better.
    • Cooperation is likely to be very unstable between competitors
  • 22.
    • THE CHANCES OF SUCCESSFUL CO-OPERATION
    • Depend on:
    • the magnitude of the potential gains
    • the temptation to cheat, the chances of detection, and the chances of effective punishment
    • whether game is repeated (and so whether retaliation can occur)
    • whether trust has been established
  • 23.
      • Repeated games
      • Players interact repeatedly in the future (but an unknown, or infinite, number of times).
      • The outcome in a repeated game is much more likely to favour cooperation (here, price unchanged).
      • A “tit-for-tat” strategy is often a very good strategy in a repeated game.
      • “ Mixed” strategies are also good.
  • 24. Our second approach: Co-opetition B.J. Nalebuff and A.M. Brandenburger Co-opetition (1996) Business is both about competition and cooperation. Cooperate about the size of the pie (win-win) Compete about division of the pie (zero-sum)
  • 25. Company Complementor Competitor Customers Suppliers The value net
  • 26. COMPLEMENTORS Customers’ side A player is your complementor if customers value your product more when they have the other players product than when they have yours alone. Suppliers’ side A player is your complementor if it is more attractive for a supplier to provide resources to you when it is also supplying the other player than when it supplying you alone.
  • 27. COMPETITORS Customers’ side A player is your competitor if customers value your product less when they have the other players product than when they have yours alone. Suppliers’ side A player is your competitor if it is less attractive for a supplier to provide resources to you when it is also supplying the other player than when it supplying you alone.
  • 28. Golden rules
    • Compete with your competitors
    • Cooperate with your complementors
  • 29.
    • Your “competitors” may be both competitors and collaborators
    • Put yourself in position of BA
    • What is its relationship to KLM?
    • Competitors for customers (and landing slots)
    • Complementors with respect to Boeing and Airbus (development costs)
    • (Especially important when development and fixed costs are SUNK )
  • 30.
    • Supplier relationships are as important as customer relationships.
    • (Think about Porter’s 5 forces model here)
  • 31. Potential entrants Suppliers Competitive Rivalry Buyers Substitutes Threats of entrants Bargaining power Threats of substitutes Bargaining power
  • 32. Potential entrants into supply market + cooperation Collaboration with suppliers Potential entrants Suppliers Competitive Rivalry Buyers Substitutes Threats of entrants Bargaining power Threats of substitutes Bargaining power
  • 33.
    • What can be done to influence the impact of the five forces?
    • Game theory suggests:
    • Try to change the “game” to your advantage?
    • Collaborate over standards
    • collaborate over new technologies
    • share risks
    • encourage in new entrants on supply side
    • Make commitments (change game from simultaneous to sequential)
    5 Force analysis: another way of thinking about one of the key questions
  • 34. Added value How much added value do you bring to a game? This is how much - at a maximum - you can expect to get from the game.
  • 35. TEAM PROBLEM An example we ask you to explore: Holland Sweetener (pages 70-74 in ‘Co-opetition’)
  • 36. Added value and bargaining power What did Pepsi and Coke do right? What did HS do wrong? And what should it have done instead? What did Monsanto do right?