Strategic Management/ Business Policy

1
Strategic Management/ Business Policy

• Power Point Set 7
• EMBA 544

2
Game Theory and Strategy

• Key Concept Preemption of Strategically
  Valuable Assets
• Access to raw materials (e.g. Alcoa)
• Wal-marts rural strategy

3
Game Theory and Strategy

• Creating Customer Switching Costs
• Establishing standards for a computer operating
  system
• Matsushitas VHS format becoming dominant over
  Sonys Beta
• Note Given that a second movers product
  development costs can be much lower than the
  first movers product development costs,
  first-mover advantages must be substantial to
  justify first moving as a strategy.

4
Game Theory and Strategy

• Technological Leadership
• In the 1970s, DuPont built a dominant position in
  the titanium dioxide market by exploiting
• superior technology
• scale economies
• accumulated experience for low costs
• Gillette competes with a differentiation strategy
  in disposable razors by exploiting
• superior technology
• reputation
• broad distribution

5
Game Theory and Strategy

• Exit Barriers are Entry Barriers
• Emphasized by Professor Joe Bain, University of
  California, Berkeley in 1950s
• Specialized Assets
• Strategic Barriers (e.g., spillover effects)
• Government and Social Barriers

6
Game Theory and Strategy
7
Analyzing Competitive Dynamics -Commitment Vs.
Flexibility

• Commitment
• Game Theoretic preemption strategy
• Flexibility
• Real (Strategic) Options Analysis

8
Factors Affecting The Likelihood of Competitor
Response

• What are the payoffs relative to other actions
  the competitor could take?
• What prior strategic commitments has the
  competitor made?
• Does the potential market fit with the
  competitors existing strategy?
• How reversible is your action or the
  competitors potential response?

9
Game Theory - A Simple Example

• Tic Tac Toe

What Happens Here?
10
Game Theory and Strategy

• Prisoners Dilemma Game

11
Game Theory and Strategy

• Prisoners Dilemma Game
• Row Player Dominant Strategy Fink
• Column Player Dominant Strategy Fink
• Dominant Strategy (Nash) Equilibrium (-8,
  -8)
• Note It is a dilemma since if they both
  cooperated by remaining silent (-1, -1).

12
Game Theory and Strategy

• The prisoners dilemma game can occur in many
  contexts
• What is best for an individual may not be best
  for a division.
• What is best for a division may not be best for a
  firm.
• What is best for a firm many not be best for an
  industry.
• What is best for an industry may not be best for
  a nation.
• What is best for a nation may not be best for the
  world.

13
Game Theory and Strategy

• Now that we have learned the concept of dominant
  strategy equilibrium, there is a second important
  equilibrium concept called a Nash equilibrium.
• Note All dominant strategy equilibrium are Nash
  equilibrium, but not all Nash equilibrium are
  dominant strategy equilibrium.

14
Game Theory and Strategy

• Game with no dominant strategy equilibrium, but a
  Game with a Nash equilibrium.

15
Game Theory and Strategy

• A cooperative game with conflict
• Game with 2 Nash equilibria.

16
Game Theory and Strategy

• Suppose this game were played sequentially?
• Would it be better to go first or second?

17
Game Theory and Strategy

• New game Joes sad undergraduate days

18
Game Theory and Strategy

• Would you want to move first or second?

19
Game Theory and Strategy

• Initial Game (played simultaneously)

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How Can Commitment Affect A Competitors
Response?

• Commitment An Irreversible Action (Sunk Costs)
• Competition In The Commercial Aircraft Industry

21
Game Theory and Strategy

• Joint Venture

22
How Can Commitment Affect A Competitors
Response?

• Commitment An Irreversible Action (Sunk Costs)

23
How Can Commitment Affect A Competitors
Response?

• Mutual sunk cost commitments

24
Game Theory and Strategy

• Lessons
• 1. Commitment (sunk costs) can be used to
  achieve cooperation.
• The importance of mutual economic hostages The
  wise manager should think beyond Machiavellis
  myopic approach to contracting and should seek
  both to give and receive credible (sunk cost)
  commitments that facilitate ongoing relationships
  and adaptation.

25
Game Theory and Strategy

• Lessons
• 2. Commitment (sunk costs) can be used to
  achieve competitive advantage.
• preemption strategy

26
Game Theory and Strategy

• Some key points on strategic commitment
• Always give attention to how your competitors
  returns vary under different strategic scenarios
• It is important to communicate the commitment to
  the other firms (for both competition and
  cooperation)
• Sunk cost investments can be used to pre-commit
  to a certain strategy and, thus, influence
  competitor response and
• Understand what strategic investments are
  important in your business and how sunk those
  investments are.