strategic competition, competitive advantage & game theory we will look at two facets of ‘game...

STRATEGIC COMPETITION,COMPETITIVE ADVANTAGE

& GAME THEORY

We will look at two facets of ‘game theory’

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

First facet:Strategic Competition

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

Dixit & Nalebuff: Thinking Strategically, 1991.

Differentiation

Hybrid

Focusseddifferentiation

Lowprice

No frills

Strategiesdestined for

ultimate failure

Perceivedbenefit

High

Low

Perceived price HighLow

1

2

3

4

5

6

7

8

Perceivedbenefit

High

+100

0

-100

Low

Price

Low High

YourProduct

Your Price(22,000)

BX

A

C

Is this sensible?

Presumably, it depends on what the others choose to do …..

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.

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

We assume:

Game played just once,

and

choices simultaneous

Me

You

00

Cut price Stick

Cut price

Stick

Me

You

00

Cut price Stick

Cut price

Stick

?

?

Me

You

00

Cut price Stick

Cut price

Stick

- 4

- 4

Me

You

00

Cut price Stick

Cut price

Stick

- 4

- 4 + 7

- 8

Me

You

00

Cut price Stick

Cut price

Stick

- 4

- 4

+ 7

- 8

+ 7

- 8

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’

1. Don’t discuss what you will do with your competitor

2. Don’t let the other person see what choice you make

3. Then swap your two notes with the pair next to you.

• 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.

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

1. Discuss what you will do with your competitor

2. Agree what you will both do3. Write that down and let each other see4. Write down below your agreed choice what

you will actually do, without showing it5. Then swap your two notes with the pair next

to you.

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

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

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

But while co-operation is often beneficial to all parties, cheating may be better.

Cooperation is likely to be very unstable between competitors

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

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.

Our second approach: Co-opetitionB.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)

Company ComplementorCompetitor

Customers

Suppliers

The value net

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.

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.

Golden rules

• Compete with your competitors

• Cooperate with your complementors

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)

Supplier relationships are as important as customer

relationships.

(Think about Porter’s 5 forces model here)

Potential entrants

SuppliersCompetitive

Rivalry Buyers

Substitutes

Threats ofentrants

Bargainingpower

Threats ofsubstitutes

Bargainingpower

Potential entrants

SuppliersCompetitive

Rivalry Buyers

Substitutes

Threats ofentrants

Bargainingpower

Threats ofsubstitutes

Bargainingpower

Potential entrants into supply market

+ cooperation

Collaboration with suppliers

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)

5 Force analysis: another way of thinking about one of the key questions

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.

TEAM PROBLEM

An example we ask you to explore:

Holland Sweetener (pages 70-74 in ‘Co-opetition’)

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?