An introduction to strategy …competitive advantage

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

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

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

4. Sustaining a competitive advantage • 1. Anticipate rival’s actions • 2. Control rival’s actions • erect barriers to entry e.g. limit pricing, patenting • 3. Credibility • 4. Strategic linkages • 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.’ • first-mover advantage

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

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

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

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

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

10. Advertising a price - honest dealer Dodgy dealer Honest dealer

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

12. Pricing decision - interdependent • Outcome is uncertain • Questions • If ‘Honest’ believes ‘Dodgy’ will advertise a low price, what is her best strategy? • Answer: 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? • Answer: Low price • For ‘Honest’, low price strategy dominates the high price strategy

13. Dominant strategy • Definition • ‘…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 • Payoff matrix • Dominant strategy = low price

14. Advertising a price - ‘dodgy’ dealer Dodgy dealer Honest dealer

15. Dominant strategy equilibrium ‘Dodgy dealer’ ‘Honest’ dealer ‘best strategy’ regardless of competitor strategy

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