Strategic Management/ Business Policy

1
Strategic Management/ Business Policy

• Game Theory and Strategy

2
Game Theory and Strategy

• Key Concept
  Preemption of
  Strategically Valuable Assets
• Access to raw materials (e.g., Alcoa)
• Wal-marts rural strategy

3
Analyzing Competitive Dynamics Commitment Vs.
Flexibility

• Commitment
• Game-theoretic preemption strategy
• Flexibility
• Real (Strategic) Options Analysis

4
Game Theory and Strategy

• Prisoners Dilemma Game

5
Game Theory and Strategy

• Prisoners Dilemma Game
• Row Player Dominant Strategy Fink
• Column Player Dominant Strategy Fink
• Dominant Strategy (Nash) Equilibrium (-8, -8)
• Note It is a dilemma since if they both
  cooperated by remaining
  silent (-1, -1).

6
Game Theory and Strategy

• The Prisoners Dilemma Game can occur in many
  contexts
• What is best for an individual may not
  be best for a division
• What is best for a division may not
  
  be best for a firm
• What is best for a firm many not
  be best for an industry
• What is best for an industry may not
  be best for a nation and
• What is best for a nation may not
  be best for the world.

7
Game Theory and Strategy

• Now that we have learned the concept of dominant
  strategy equilibrium, there is a second important
  equilibrium concept called a Nash equilibrium.
• Note All dominant strategy equilibrium are
  Nash equilibrium, but not all Nash
  equilibrium are
  dominant strategy equilibrium.

8
Game Theory and Strategy

• Game with no dominant strategy equilibrium, but a
  Game with one Nash equilibrium

9
Game Theory and Strategy

• A cooperative game with conflict
• Game with multiple (two) Nash equilibria

10
Game Theory and Strategy

• Suppose this game were played sequentially?
• Would it be better to go first or second?

11
Game Theory and Strategy

• Would you want to move first or second?

12
Game Theory and Strategy

• Joint Venture

13
How Can Commitment Affect A Competitors
Response?

• Commitment An Irreversible Action (Sunk Costs)

14
How Can Commitment Affect A Competitors
Response?

• Mutual sunk cost commitments

15
Game Theory and Strategy

• Lessons 1
• Commitment (sunk costs) can be
  
  used to achieve cooperation.
• The importance of mutual economic hostages The
  wise manager should think beyond Machiavellis
  myopic approach to contracting and
  should seek both to give and receive credible
  (sunk cost) commitments that facilitate ongoing
  relationships and adaptation.

16
Game Theory and Strategy

• Initial Game (played simultaneously)

17
How Can Commitment Affect A Competitors
Response?

• Commitment An Irreversible Action (Sunk Costs)
• Competition In The Commercial Aircraft Industry

18
Game Theory and Strategy

• Lessons 2
• 2. Commitment (sunk costs) can be used
  to achieve competitive advantage.
• Preemption strategy