STRATEGIC COMPETITION, COMPETITIVE ADVANTAGE

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STRATEGIC COMPETITION,COMPETITIVE ADVANTAGE
GAME THEORY

• We will look at two facets of game theory

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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

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First facetStrategic Competition

• Strategic thinking is the art of outdoing an
  adversary knowing that the adversary is trying to
  outdo you.

Dixit Nalebuff Thinking Strategically, 1991.
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High
Differentiation
Focussed differentiation
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Hybrid
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Perceived benefit
Low price
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1
7
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Strategies destined for ultimate failure
No frills
Low
High
Low
Perceived price
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Is this sensible?
Perceived benefit
High 100 0 -100 Low
C
Your Product
B
X
A
Low High
Your Price (22,000)
Price
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Presumably, it depends on what the others choose
to do ..
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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.
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• 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

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We assume Game played just once, and choices
simultaneous
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Me
Cut price
Stick
Cut price
You
0
Stick
0
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Me
Cut price
Stick
?
Cut price
?
You
0
Stick
0
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Me
Cut price
Stick
- 4
Cut price
- 4
You
0
Stick
0
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Me
Cut price
Stick
- 8
- 4
Cut price
7
- 4
You
0
Stick
0
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Me
Cut price
Stick
- 8
- 4
Cut price
7
- 4
You
7
0
Stick
- 8
0
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• 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
• Dont discuss what you will do with your
  competitor
• Dont let the other person see what choice you
  make
• Then swap your two notes with the pair next to
  you.

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• 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.

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• 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.

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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

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• 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

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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

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• But while co-operation is often beneficial to all
  parties, cheating may be better.
• Cooperation is likely to be very unstable between
  competitors

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• 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

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• 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.

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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)
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Customers
The value net
Company
Complementor
Competitor
Suppliers
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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.
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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.
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Golden rules

• Compete with your competitors
• Cooperate with your complementors

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• 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)

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• Supplier relationships are as important as
  customer relationships.
• (Think about Porters 5 forces model here)

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Potential entrants into supply market
cooperation
Collaboration with suppliers
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5 Force analysis another way of thinking about
one of the key questions

• 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)

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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.
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TEAM PROBLEM An example we ask you to
explore Holland Sweetener (pages 70-74 in
Co-opetition)
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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?