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

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

Implementation of strategy Business organisation & control Business organisation & control Strategic linkages Strategic linkages within and between firms within and between firms vertical or horizontal linkages vertical or horizontal linkages e.g. alliances or joint ventures e.g. alliances or joint ventures

Sustaining a competitive advantage 1. Anticipate rivals actions 1. Anticipate rivals actions 2. Control rivals actions 2. Control rivals actions erect barriers to entry e.g. limit pricing, patenting erect barriers to entry e.g. limit pricing, patenting 3. Credibility 3. Credibility 4. Strategic linkages 4. Strategic linkages 5. Sun Zhu (500BC) 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. …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 first-mover advantage

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

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

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

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

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

Advertising a price - honest dealer Honest dealer Dodgy dealer

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

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

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

Advertising a price - dodgy dealer Honest dealer Dodgy dealer

Dominant strategy equilibrium Dodgy dealer Honest dealer best strategy regardless of competitor strategy

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