An introduction to strategy

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An introduction to strategycompetitive advantage

• An overview of corporate strategy
• Strategic analysis
• Implementation
• Sustaining a competitive advantage
• Strategic behaviour - price, advertising...
• Oligopolistic markets
• Types of oligopoly

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Strategic analysis

• 1. Strategic core
• specific assets competitive advantage
• 2. Analysis of the environment
• e.g. demand analysis, suppliers, finance,
  competitors
• e.g. government policy, potential competitors
• e.g. social cultural changes
• 3. Choosing a strategy
• market selection e.g. profit, growth, market
  share
• product positioning

3
Implementation of strategy

• Business organisation control
• Strategic linkages
• within and between firms
• vertical or horizontal linkages
• e.g. alliances or joint ventures

4
Sustaining a competitive advantage

• 1. Anticipate rivals actions
• 2. Control rivals actions
• erect barriers to entry e.g. limit pricing,
  patenting
• 3. Credibility
• 4. Strategic linkages
• 5. Sun Zhu (500BC)
• he who occupies the field of battle first and
  awaits his enemy is at ease he who comes later
  to the scene and rushes into the fight is weary.
• first-mover advantage

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Oligopoly

• Exists when
• small number of firms
• interdependence
• Examples
• Tobacco, Motor Vehicles, Aerospace
• local petrol station
• Other characteristics?

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Characteristics

• (i) Type of product
• homogenous or unique
• (ii) Blockaded entry exit
• e.g. scale economies (breweries)
• e.g. ownership of factors
• e.g. aggressive tactics (supermarkets,
  newspapers)
• (iii) Imperfect information

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Types of oligoploy

• (i) Collusive
• co-operation, non-competition
• cartels
• (ii) Tacit collusion
• e.g. price changes
• kinked demand model
• (ii) Non-collusive
• competition
• game theory

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Tacit collusion - kinked demand model

• Predictions
• Price stability
• Despite variations in costs
• Why?
• Rival firms match price cuts
• Rivals do not match price rises
• MC may rise but profit maximising P,Q are
  unchanged
• Construction of model

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Non-collusive oligopoly

• Game theory
• how to gain a competitive edge and steal market
  share
• Firms players
• Behaviour strategic
• Rewards payoffs
• Simple model - two car dealers
• Act independently, rational
• Simultaneous decisions

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Advertising a price - honest dealer
Dodgy dealer
Honest dealer
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Advertising a price - honest dealer
Dodgy dealer
4. Worst outcome for Honest
1.If Dodgy High, Honest greater profit
Honest dealer
3. Best outcome for Honest
2. Ignoring Dodgy, profit is lower if
HonestHigh
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Pricing decision - interdependent

• Outcome is uncertain
• Questions
• If Honest believes Dodgy will advertise a low
  price, what is her best strategy?
• Answer Advertise a low price
• But, Dodgy may not advertise a low price
• What is her best strategy if she believes Dodgy
  will advertise a high price?
• Answer Low price
• For Honest, low price strategy dominates the
  high price strategy

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Dominant strategy

• Definition
• is one that is always strictly better than
  every other strategy for that player regardless
  of the strategies chosen by other players.
• Dodgy dealer asks the same questions
• Payoff matrix
• Dominant strategy low price

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Advertising a price - dodgy dealer
Dodgy dealer
Honest dealer
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Dominant strategy equilibrium
Dodgy dealer
Honest dealer
best strategy regardless of competitor strategy
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Nash equilibrium - non-cooperative

• the outcome resulting from each firm making its
  optimal decision based on their assumptions about
  their rivals decisions.
• equilibrium also low price
• A high, high strategy is superior, but unstable
• because one player could switch to a low price
• to gain market share...