Economic Foundations of Strategy Power Point Set #4.
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Transcript of Economic Foundations of Strategy Power Point Set #4.
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Economic Foundations Economic Foundations of Strategyof Strategy
Power Point Set #4
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Game Theory and Strategy
Key Concept: Preemption of Strategically Valuable Assets
Access to raw materials (e.g. Alcoa)
Wal-mart’s rural strategy
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Game Theory and Strategy
Creating Customer Switching Costs
Establishing standards for a computer operating systemMatsushita’s VHS format becoming dominant over Sony’s BetaNote: Given that a second mover’s product development costs can be much lower than the first mover’s product development costs, first-mover advantages must be substantial to justify first moving as a strategy.
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Game Theory and StrategyTechnological 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
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Analyzing Competitive Dynamics -Commitment Vs. Flexibility
CommitmentGame Theoretic preemption strategy
FlexibilityReal (Strategic) Options Analysis
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Game Theory and Strategy
Prisoners’ Dilemma GameR
ow
Silen
ce
Fin
k
Silence FinkColumn
-1
0-1
0
-10 -8
-8
-10
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Game Theory and Strategy
Prisoners’ Dilemma Game
Row Player: Dominant Strategy: FinkColumn 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).
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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.
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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.
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Game Theory and StrategyGame with no dominant strategy equilibrium, but a Game with a Nash equilibrium.
Row
Coop
era
teFin
kCooperate Fink
Column
5
4 1
9
-1 0
0
4
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Game Theory and Strategy
A cooperative game with conflictGame with 2 Nash equilibria.
Man
Pri
ze F
igh
tB
allet
Prize Fight BalletWoman
2
-1 1
-5
-5 2
1
-1
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Game Theory and StrategySuppose this game were played sequentially?Would it be better to go first or second?
Man
Pri
ze F
igh
tB
allet
Prize Fight BalletWoman
2
-1 1
-5
-5 2
1
-1
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Game Theory and StrategyGame Theory and Strategy
New game: Joe’s sad undergraduate days
Man
Pri
ze F
igh
tB
allet
Prize Fight BalletWoman
10
100 20
4
90 30
8
6
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Game Theory and StrategyGame Theory and Strategy
Would you want to move first or second?
Man
Pri
ze F
igh
tB
allet
Prize Fight BalletWoman
10
100 20
4
90 30
8
6
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Sources of First Mover Advantages
Economies of ScaleExperience or Learning Curve EffectsBrand Equity“Network Externalities”
- How are you going to use these effects to get a first mover advantage? - How does this lead to a sustainable advantage?
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First Mover Disadvantages May Lead To Second Mover Advantages
The Costs of Early Adoption - The “Bleeding Edge” of Technology
Changing Product and/or Process Technology
Changing Consumer Tastes Product TechnologyProcess Technology
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Game Theory and Strategy
Initial Game (played simultaneously)
Air
bu
s
No L
au
nch
Lau
nch
No Launch LaunchBoeing
400
400300
300
200 -100
-200
200
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How Can “Commitment” Affect A Competitor’s Response?How Can “Commitment” Affect A Competitor’s Response?
Commitment = An Irreversible Action (Sunk Costs)Competition In The Commercial Aircraft Industry
Air
bu
s
No L
au
nch
Lau
nch
No Launch LaunchBoeing
400
400300
300
200 -100
-200
200
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Game Theory and StrategyGame Theory and Strategy
Joint Venture
Coop
era
teL.
Race
Cooperate L. Race
112
123112
123
58 91
91
58
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How Can “Commitment” Affect A Competitor’s Response?How Can “Commitment” Affect A Competitor’s Response?
Commitment = An Irreversible Action (Sunk Costs)
GM Coop
era
teL.
Race
Cooperate L. RaceToyota
112
123112
-28
58 91
-51
58
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How Can “Commitment” Affect A Competitor’s Response?How Can “Commitment” Affect A Competitor’s Response?
Mutual sunk cost commitments
GM Coopera
teL.
Race
Cooperate L. RaceToyota
112
-28112
-28
58 -51
-51
58
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Game Theory and StrategyLessons
1. Commitment (sunk costs) can be used to achieve cooperation (e.g., Toyota and GM)
The importance of mutualmutual economic hostages: The wise manager should think beyond Machiavelli’s myopic approach to contracting and should seek both to give and receive credible (sunk cost) commitments that facilitate ongoing relationships and adaptation.
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Game Theory and Strategy:Lessons
2. Commitment (sunk costs) can be used to achieve competitive advantage.
•preemption strategy (e.g., Airbus vs. Boeing)
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Game Theory and StrategySome 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.