An introduction to strategyAn introduction to strategy…competitive advantage…competitive advantage

An overview of corporate strategyAn overview of corporate strategy Strategic analysisStrategic analysis ImplementationImplementation Sustaining a competitive advantageSustaining a competitive advantage

Strategic behaviour - price, Strategic behaviour - price, advertising...advertising... Oligopolistic marketsOligopolistic markets Types of oligopolyTypes of oligopoly

Strategic analysisStrategic analysis 1. Strategic core1. Strategic core

specific assets = competitive advantagespecific assets = competitive advantage 2. Analysis of the environment2. Analysis of the environment

e.g. demand analysis, suppliers, e.g. demand analysis, suppliers, finance, competitorsfinance, competitors

e.g. government policy, potential e.g. government policy, potential competitorscompetitors

e.g. social & cultural changese.g. social & cultural changes 3. Choosing a strategy3. Choosing a strategy

market selection e.g. profit, growth, market selection e.g. profit, growth, market sharemarket share

product positioningproduct positioning

Implementation of strategyImplementation of strategy

Business organisation & controlBusiness organisation & control Strategic linkages Strategic linkages

within and between firmswithin and between firms vertical or horizontal linkagesvertical or horizontal linkages e.g. alliances or joint venturese.g. alliances or joint ventures

Sustaining a competitive advantageSustaining a competitive advantage

1. Anticipate rival’s actions1. Anticipate rival’s actions 2. Control rival’s actions 2. Control rival’s actions

erect barriers to entry e.g. limit pricing, erect barriers to entry e.g. limit pricing, patentingpatenting

3. Credibility3. Credibility 4. Strategic linkages4. Strategic linkages 5. Sun Zhu (500BC)5. Sun Zhu (500BC)

‘…‘…he who occupies the field of battle first and he who occupies the field of battle first and awaits his enemy is at ease; he who comes later awaits his enemy is at ease; he who comes later to the scene and rushes into the fight is weary.’to the scene and rushes into the fight is weary.’

first-mover advantagefirst-mover advantage

OligopolyOligopoly

Exists whenExists when small number of firmssmall number of firms interdependenceinterdependence

ExamplesExamples Tobacco, Motor Vehicles, AerospaceTobacco, Motor Vehicles, Aerospace ‘‘local’ petrol stationlocal’ petrol station

Other characteristics?Other characteristics?

CharacteristicsCharacteristics

(i) Type of product(i) Type of product homogenous or uniquehomogenous or unique

(ii) Blockaded entry & exit(ii) Blockaded entry & exit e.g. scale economies (breweries)e.g. scale economies (breweries) e.g. ownership of factorse.g. ownership of factors e.g. aggressive tactics (supermarkets, e.g. aggressive tactics (supermarkets,

newspapers)newspapers)

(iii) Imperfect information(iii) Imperfect information

Types of oligoployTypes of oligoploy

(i) Collusive (i) Collusive co-operation, non-competitionco-operation, non-competition cartelscartels

(ii) Tacit collusion(ii) Tacit collusion e.g. price changese.g. price changes kinked demand modelkinked demand model

(ii) Non-collusive(ii) Non-collusive competitioncompetition game theorygame theory

Tacit collusion - kinked demand Tacit collusion - kinked demand modelmodel

PredictionsPredictions Price stabilityPrice stability Despite variations in costsDespite variations in costs

Why?Why? Rival firms Rival firms matchmatch price cuts price cuts Rivals do Rivals do not matchnot match price rises price rises

MC may rise but profit maximising MC may rise but profit maximising P,Q are unchangedP,Q are unchanged

Construction of modelConstruction of model

Non-collusive oligopolyNon-collusive oligopoly

Game theory Game theory ……how to gain a competitive edge how to gain a competitive edge

and steal market shareand steal market share Firms = playersFirms = players Behaviour = strategicBehaviour = strategic Rewards = payoffsRewards = payoffs

Simple model - two car dealersSimple model - two car dealers Act independently, rationalAct independently, rational Simultaneous decisions Simultaneous decisions

Advertising a price - honest dealer Advertising a price - honest dealer

Low price

High price

Low price

£100

£200

High price

£50

£150

Honestdealer

Dodgy dealer

Advertising a price - honest dealer Advertising a price - honest dealer

Low price

High price

Low price

£100

£200

High price

£50

£150

Honestdealer

Dodgy dealer

1.If ‘Dodgy’ = High,‘Honest’ = greaterprofit

2. Ignoring ‘Dodgy’, profit is lower if ‘Honest’=High

3. Best outcomefor ‘Honest’

4. Worst outcomefor ‘Honest’

Pricing decision - interdependentPricing decision - interdependent

Outcome is uncertainOutcome is uncertain QuestionsQuestions

If ‘Honest’ believes ‘Dodgy’ will advertise a If ‘Honest’ believes ‘Dodgy’ will advertise a lowlow price, what is her best strategy? price, what is her best strategy?

Answer: Advertise a low priceAnswer: Advertise a low price

But, ‘Dodgy’ may not advertise a low But, ‘Dodgy’ may not advertise a low priceprice What is her best strategy if she believes What is her best strategy if she believes

‘Dodgy’ will advertise a ‘Dodgy’ will advertise a highhigh price? price? Answer: Low priceAnswer: Low price

For ‘Honest’, low price strategy For ‘Honest’, low price strategy dominates the high price strategydominates the high price strategy

Dominant strategyDominant strategy

DefinitionDefinition ‘…‘…is one that is always strictly better is one that is always strictly better

than every other strategy for that than every other strategy for that player regardless of the strategies player regardless of the strategies chosen by other players.’chosen by other players.’

‘‘Dodgy’ dealer asks the same Dodgy’ dealer asks the same questionsquestions Payoff matrix Payoff matrix Dominant strategy = low priceDominant strategy = low price

Advertising a price - ‘dodgy’ dealer Advertising a price - ‘dodgy’ dealer

Low price

High price

Low price

£100

£50

High price

£200

£150

Honestdealer

Dodgy dealer

Dominant strategy equilibriumDominant strategy equilibrium

Low price

High price

Low price

£100, £100

£200, £50

High price

£50, £200

£150,£150

‘Dodgy dealer’

‘Honest’dealer

‘best strategy’ regardless of competitor strategy

Nash equilibrium - non-Nash equilibrium - non-cooperativecooperative

‘…‘…the outcome resulting from each firm the outcome resulting from each firm making its optimal decision based on making its optimal decision based on their assumptions about their rivals their assumptions about their rivals decisions.’decisions.’ equilibrium also = low priceequilibrium also = low price

A high, high strategy is superior, but A high, high strategy is superior, but unstableunstable ……because one player could switch to a ‘low’ because one player could switch to a ‘low’

priceprice … … to gain market share...to gain market share...