1. Competitive & Cooperative Strategies
Co-opetition
Competitive & Cooperative Strategies
Barry Nalebuff
Yale School of Management
11/2/98
Will there be a screen set up so I can see the notes pages?

2. Game Theory Newtonian mechanics Interdependent Decision Theory
Began with Theory of Games and Economic Behavior by John von Neumann and Oskar Morgenstern (1944)
Newtonian mechanics
For every action there is a reaction
Interdependent Decision Theory
Engineer versus Manager

3. Business as a Game Chess, poker, sports? Not win-win Not win-lose
War and Peace
Cooperate to create value
Compete to divide it up

4. Business as a Game Chess, poker, sports? Not win-lose No rule book
People change the game
Success comes from playing the right game

5. “Philosophers have only interpreted the world. The point, however,
is to change it.”

6. “Philosophers have only interpreted the world. The point, however,
is to change it.”
--Karl Marx

7. The Right Game Analyse existing game Understand distribution of power
Model equilibrium
Design new game
Can’t rely on being a fast-follower
Nothing so practical as a good theory

8. Added Value YOUR ADDED VALUE =
The Size of the Pie When You’re in the Game
minus
The Size of the Pie When You’re Out of the Game

9. Added Value Can’t get more than your added value
Zero added value means get zero

10. Ego vs. Allo What happens when you participate in a game?
Ego view: What’s in it for you
Allo view: How does your play change the game for others?
Jimmy Stewart in “It’s a Wonderful Life”

11. 5 Forces Buyer power Supplier power Threats from substitutes
Threats from entrants
Inter-firm rivalry

12. The Value Chain
CUSTOMERS
BUSINESS
SUPPLIERS
Companies compete to dominate one or more stages of the chain
But, what is relationship between Microsoft & Intel?
Which of the 5 Forces?

13. New Language: Complementor
Business strategy frameworks often overlook the role of complements
No existing word to describe providers of complements
customers, suppliers, and complementors can all be partners
Not more important --- As important
No different than relationship with customers and suppliers. Tension, but you each need each other.
Need not be a partner to be a complementor. Intel and Microsoft.

14. Competitor vs. Complementor
A player is your complementor if customers value your product more when they have the other player’s product than when they have your product alone.
A player is your competitor if customers value your product less when they have the other player’s product than when they have your product alone.

15. Complementors Technical Definition WtP(A & B) > WtP(A) + WtP(B)
Two businesses A and B are complementors with respect to a customer if WtP (willingness-to-pay) for both of their products together is greater than WtP for A’s product alone plus WtP for B’s product alone:
WtP(A & B) > WtP(A) + WtP(B)
Superadditivity in WtP

16. Added Value Strategies
Increasing your Added Value
Complements
creating new ones
creating better ones
getting them cheaper
reducing the power of complementors
stepping outside the value chain

17. Examples of Complements
Pentium II and Windows NT
ASDL and Hardware/Software
Desktop printers and Digital Cameras (HP/Polaroid)
Cars and Roads -- Michelin guide
Golf courses (ski mountains) and real estate
Carnival cruise and Carnival air
Gap and Casual Friday
Hallmark/Mazaroff and Valentines Day
TV and TV guide
Red wine and Dry Cleaners

18. Flip Side of Complements
Your product makes someone else’s more valuable
Railroads and land
IBM and Microsoft/Intel
TV and TV Guide
SAP and Windows NT
Microsoft needs SAP -- to prove scalability/reliability of NT

19. The Value Net
CUSTOMERS
COMPETITORS
BUSINESS
COMPLEMENTORS
SUPPLIERS

20. Intel’s Strategy in the Value Net
“Only the Paranoid Survive”
---Andy Grove, CEO
Competitor strategy:
Continuous innovation
Customer strategy:
Intel Inside campaign
Supplier strategy
Dual sourcing
Pandesic: people buy more servers with Pentium chips.
Hence good to support online commerce

21. Complementors: A Sixth Force
“Processor performance alone is not enough. We must address two ‘valleys of death,’ namely, the processor-to-memory and processor -to-graphics bus bandwidth bottlenecks.” --- Andrew Grove
Partnerships with MCI, Real Networks, CAA, ...
DSL (w. Compaq and Microsoft)
PCI bus and now dual independent bus
Proshare ($400 million plus)
Pentium II webpages, QuickWeb
Video editing
Video games: Sea Racers
Pandesic
Voice recognition What about DOS (4.0), Windows?

22. What to do if no AV?
Becoming a player changes the game--in particular, the added values
Examples
Holland Sweetener
Norfolk Southern
BellSouth

23. Competition is valuable
Pay Me to Play
Competition is valuable
Don’t give it away
Get paid to play

24. Ways to Get Paid to Play
1. Ask for contributions toward bidding expenses etc.
2. Ask for a guaranteed sales contract
3. Ask for a last-look provision
4. Ask for better access to information
5. Ask to deal with someone who will appreciate what you bring to the table
6. Ask to bid on other pieces of business
7. Ask the customer to quote a price at which he would give you his business
Cash is okay, too

25. 8 Hidden Costs of Bidding
1. You’re unlikely to succeed
2. Even if you win, the price is so low you lose money
3. The incumbent can retaliate
4. Your existing customers will now want a better deal
5. New customers will use the low price as a benchmark
6. Competitors will use the low price as a benchmark
7. You give your customers’ competitors a lower cost
8. You destroy your competitors’ glass houses

26. War and Peace Cooperation in creating value
Competition in dividing it up
Simultaneously War and Peace
New mindset Coopetition