Title: STRATEGIC COMPETITION, COMPETITIVE ADVANTAGE
1STRATEGIC COMPETITION,COMPETITIVE ADVANTAGE
GAME THEORY
- We will look at two facets of game theory
2Antecedents
- 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
3First 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.
4High
Differentiation
Focussed differentiation
4
Hybrid
3
5
Perceived benefit
Low price
2
6
1
7
8
Strategies destined for ultimate failure
No frills
Low
High
Low
Perceived price
5Is this sensible?
Perceived benefit
High 100 0 -100 Low
C
Your Product
B
X
A
Low High
Your Price (22,000)
Price
6Presumably, it depends on what the others choose
to do ..
7Presumably, 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
10Me
Cut price
Stick
Cut price
You
0
Stick
0
11Me
Cut price
Stick
?
Cut price
?
You
0
Stick
0
12Me
Cut price
Stick
- 4
Cut price
- 4
You
0
Stick
0
13Me
Cut price
Stick
- 8
- 4
Cut price
7
- 4
You
0
Stick
0
14Me
Cut price
Stick
- 8
- 4
Cut price
7
- 4
You
7
0
Stick
- 8
0
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 - 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.
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.
18Many 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
20Cooperation 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.
24Our 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 Customers
The value net
Company
Complementor
Competitor
Suppliers
26COMPLEMENTORS 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.
27COMPETITORS 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.
28Golden 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 Porters 5 forces model here)
31(No Transcript)
32Potential entrants into supply market
cooperation
Collaboration with suppliers
335 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)
34Added 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.
35TEAM PROBLEM An example we ask you to
explore Holland Sweetener (pages 70-74 in
Co-opetition)
36Added 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?