bus 401 final

tit-for-tat strategy

a strategy that responds in kind to the moves of rivals. companies watch each other closely and mimic what their rivals are doing. as long as a rival is "cooperating", the firm chooses to cooperate. if a rival defects from a cooperative stance, the firm responds in kind.

game theory

a structured approach to analysis of competitor interaction that yields predictions about which strategic actions are most likely to be chosen by rivals

individual proprietorship

a legal structure for organizing where the same person owns and runs the business. in the first hundred years of our nation's history, most economic activity was carried out this way.

nexus of contracts

a model of the corporation suggesting that the firm is the sum total of its contracts with different stakeholders

creating an ethical climate

cultures can help people see the ethical challenges they face and give them tools to make the correct choices. shared values and style are the core of a company's culture. these two elements can help a company create a climate where ethical behavior becomes the expected norm.

simultaneous move, one shot games

platers make their moves simultaneously and they play the game only once. prisoner's dilemma

why can't rivals in other groups be ignored?

rivals could begin targeting customer segments with new offerings or more favorable value propositions and eventually steal customers

2. pursue a low cost strategy

since companies in competitive markets are price takers not setters, they have little control over price. to realize profit, they must drive down their costs. rivals can expect other firms to aggressively lower costs, so they must respond in kind in order to remain competitive.

2. the good society ensure a basic set of rights for its citizens

utility is good, but people have fundamental rights that cannot be violated or traded away and duties they can't ignore. it is immoral to use people in any way as merely means to an end.

ethical values

values that define for an individual, group, or society things that are morally right or wrong

pay for performance

variable or contingent compensation that focuses managers on key variables, designed to align their interests with the shareholders 2 types: bonuses and stock based compensation

3. the good society creates the most freedom for people to act as they please

very limited government and efficient markets. promotes human freedom of expression and development. free markets are morally good because they allow people the maximum amount of choice.

ethics answer what question

what values will guide the journey?

4. in a good society, individuals care for each other, exhibit empathy with others, and focus on meaningful relationships

(ethic of care); in pursuit of our goals of utility, rights, duties, etc, we need to be concerned about other people

culture

a pattern of behaviors and beliefs that are considered appropriate and correct for organizational members; how things are done in an organization. pilots the organization by helping each individual employee decide what to do. very powerful as it informs actions without the need for supervision from managers, exec, or the board. influences how people react to ethical challenges they face at work.

competitor response profile

a profile of a competitor that identifies its objectives and assumptions, its strategy, and its resources and capabilities in order to anticipate how the competitor might respond to rival actions

strategic group

a set of companies that compete in similar ways with similar business models pursuing similar sets of customers

nash equilibrium

a set of moves in a game that simultaneously maximize each firm's payoff given the choices of rivals, and from which no player has an incentive to defect. players are striving to achieve their best possible outcome while ensuring the outcome is stable. the solution concept used to predict the outcome of competitive interaction.

major provisions of Sarbanes-Oxley Act

-auditors -CEOs and CFOs -executives

external governance control mechanisms

-market for corporate control -auditors -banks and analysts -regulatory bodies (Sarbanes-Oxley Act in 2002) -media and public activists

4 arguments of ethical behavior

1. a good society create the greatest good for the greatest number of people 2. the good society ensures a basic set of rights for its citizens 3. the good society creates the most freedom for people to act as they please 4. in a good society, individuals care for each other, exhibit empathy with others, and focus on meaningful relationships these provide people with different perspectives on what constitutes ethical behavior, but are abstract.

how to make a competitor response profile

1. ask "what drives the competitor?" - objectives 2. ask "what assumptions reinforce these objectives?" - assumptions 3. ask "what is the competitor capable of doing?" - strategy 4. ask "what resources and capabilities does the competitor use to accomplish this strategy?" - resources & capabilities 5. after those factors are laid out, a company can anticipate how a competitor might respond to specific moves

4 ethical dimensions of ethical behavior

1. caring for and avoiding harm to individuals (includes animals and natural environment) 2. concern about fairness and the condemnation of cheating (equality, equity or merit) 3. recognition of things as sacred or degraded (respect religious beliefs and other norms) 4. praise of liberty and condemnation of oppression (things that promote human development are good) these lay the foundation for ethical behaviors in business.

how does culture influence how people will respond to ethical challenges?

1. culture tells us the "correct way to perceive" the world around us 2. culture provides us with a set of reasons that justify actions

duties of directors

1. duty of care: participate in organizational planning & decision making to make sound decisions 2. duty of loyalty: interests of the corporation above anything else 3. duty of obedience: complies with all rules and laws

3 questions to flourish

1. how much of what i do centers around money, promotion, and outward signs of success? 2. how important are relationships to me? 3. how important are development and growth to you?

four principles of competitive strategy

1. know your strengths and weaknesses 2. bring strength against weakness 3. protect and neutralize vulnerabilities 4. develop strategies that cannot be easily imitated or copied (go where the competitor is not)

2 reasons against the stakeholder model

1. managers need to focus on a single objective - making shareholder value the final decision criteria gives managers a clear direction for the tough tradeoffs they must make in the course of formulating and implementing strategy 2. stakeholder management has a dark side: stakeholders may make, and try to enforce, unreasonable and narrow minded claims on the firm.

how to succeed in perfect competition?

1. merge or consolidate markets 2. pursue low cost 3. pursue differentiation strategies

how do oligopolists compete?

1. monitor and mimic rival behavior 2. employ tit-for-tat strategies

2 reasons to support stakeholder model

1. point to what executives and managers actually do, which is spend most of their time interacting with and managing the demands and needs of different stakeholder groups 2. many people believe that stakeholder groups have the right to be considered in decisions that will have an impact on them. this is known as the intrinsic stakeholder model

how does a monopolist reinforce its monopoly?

1. raising entry barriers 2. limiting competitive access to scarce resources 3. innovating and patenting 4. introduce new products frequently

3 reasons to support shareholder primacy model

1. shareholders are the legal owners of the corporation's assets - executives are legally and morally obligated to work for the owners 2. financial capital is the most important input into make a business successful - without funds the business would not exist 3. other societies and business arrangements in which business firms try to maximize the welfare of some other stakeholder group (like employees or local community) - those corporations don't really maximize welfare and often cause real damage to economies, communities, and environment

3 reasons against the shareholder primacy model

1. shareholders don't really own the corporation - they own stock they can easily trade 2. shareholders have different objectives for investing in a firm - some do it for long term investment and others hold stock for short periods of time 3. failures of other firms are evidence that managing for shareholder value creates negative consequences for firms, investors, and society at large

two property rights of shareholders

1. shareholders have claim to the residual earnings of the corporation, or the profits after all other stakeholders have been paid. 2. shareholders buy the right to monitor the management team to make sure that the team works in their best interests.

in what 2 situations does the agency problem destroy value?

1. when the principal's investments are sunk and difficult to recover 2. when the principal's ability to monitor and supervise the actions and decisions of the agents is limited

3 questions about governance

1. where will we steer the corporation? (purpose, goal, where we want to end up, who do we manage for?) 2. who will act as the pilot? 3. what principles will guide the pilots of the journey? (ethical values)

partnership

a legal structure for organizing where the owners of a business share ownership. the partnership is not separate from its owners.

3. protect and neutralize vulnerabilities

a company's own weaknesses must either be strengthened or truly neutralized, that is, made irrelevant so that they don't become targets of competitors.

1. know your strengths and weaknesses

a company's strengths are the resources and capabilities that deliver unique value. a company's weaknesses are the resources and capabilities that are subject to rapid obsolescence, easy imitation, or high cost not recouped by value. a company must make a careful and accurate assessment of their strengths and weaknesses because these form the foundation of competitive strategy.

agency problem

a consequence of the separation of ownership (shareholders/principals) and control (managers/agents) in the corporation. agency problems occur when the goals of principals differ from those of agents.

charter

a document that authorizes a person to form a corporation for a very limited purpose. there was no debate about the purpose of a corporation because its purpose is clearly stated in charter. you needed a charter to obtain permission to begin and to sell stock.

mission statement

a formal declaration of a company's core values, business objectives, and ethical aspirations. a good mission statement clarifies who the company's stakeholders are and how they should be treated.

stock grants

a gift, or grant, of stock given to the organizational members, primarily executives.

corporation

a legal structure for organizing where the organization is a distinct and separate entity from its owners, also known as shareholders

why is a strategy canvas useful?

a way to assess relative competitive strengths and weaknesses against specific purchase criteria. it provides insight into how competitive offerings are differentiated. useful to identify new ways to beat rivals, new opportunities for competitive positioning by rating firms on various criteria that customers use to make purchase decisions, the analyst is quickly able to grasp similarities and differences in how companies attempt to offer unique value to customers relative to competitors

bonuses

additional compensation paid to executives, managers, and employees when they meet certain performance objectives.

2. bring strength against weakness

after a company's key strengths are identified, they should be targeted to competitor weaknesses. bringing strength against a weakness can have devastating effects on the competition. companies should not be afraid of attacking competitive strengths.

culture that promotes unethical behavior

allow people to deny or not see the ethical dimension of their actions. if people do not see the ethical challenge involved, the culture provides a set of justifications, or ways to rationalize their unethical behavior

strategic group analysis

an analysis that breaks down the structure of a market or industry into constituent groups

proxy fight

an attempt by dissatisfied investors or stakeholders to gain seats on the board of directors, or to influence corporate policy.

tender offer

an offer by those (corporate raiders or takeover artists) hoping to control the corporation to purchase shares of dissatisfied investors. usually a 10% to 30% premium above the current stock price but below what they believe the company is really worth

barrier to mobility

any factor that limits the ability of a company to move between strategic groups

stakeholder

any person or group that can affect or is affected by the activities of the corporation primary stakeholder groups of most organizations are shareholders, customers, suppliers, employees, and local communities (including governments). secondary stakeholders include competitors, national or global communities, special interest groups.

1. raising entry barriers

barrier to entry: any factor that increases the costs, lowers the profit margins, or limits the market share of entrants to a market. investing in heavy advertising or advertising over long periods of time also raise entry barriers.

universal principals of accountable governance

board: -governs on behalf of all owners -is the highest authority, under owners -is the initial authority in the firm -is accountable for everything about the firm -authority and accountability is vested in the board as a group -governance and management are different -assessing board performance is vital

how are strategic group maps constructed?

by identifying the main differences in the ways in which firms in an industry compete to deliver value. the rule is to choose factors that are the most relevant in describing the differences in how companies compete for customers. label one dimension along the horizontal axis and one dimension along the vertical axis, and plot each company's relative position for each dimension, forming distinctive clusters surrounded by a dotted line. each company's circle size is based on the revenues.

4. introduce new products frequently

by introducing new products frequently, monopolists can maintain the customer demand associated with their products and stay ahead of potential entrants who are trying to get into their markets. this is also a way to overcome a potential weakness of rapid obsolescence.

competition under "perfect" competition

competitive markets have many firms. firms are price takers not setters because attempts to use price strategically are not effecting and hurt the firm that tries. since a firm sells a homogeneous good in a market of many firms, raising price leads to a dramatic drop in sales as customers go elsewhere. lowering prices can also backfire because firms are assumed to operate at full capacity. firms in competitive markets set prices at the market prevailing price and largely avoid strategic manipulation of price.

in repeated games, is playing the one shot nash equilibrium ever in a firm's best interest?

depends on differences in cash flows between collusion and defection (defection here means playing the one shot action). the value of these cash flows depends on the time value of money since payoffs are received each period in perpetuity. typically, ongoing collusion is the best approach and it is what firms in long standing stable competition practice.

when is game theory useful?

especially useful in contexts in which only a few rivals exist and these rivals are considering such moves as price changes, capacity adjustments, or new product features, and are wondering how competitors are likely to respond. solving a simple game can provide insight into how competitors are likely to play more complex games.

shared values

everyone, from the board and everyone below, must buy into the mission and figure out how it influences their daily behaviors. companies should also make a formal code of ethics as a part of their shared values

inside directors

executives or managers working inside the company who also hold seats on the board of directors

in order to effectively compete, a company must

first know the competition and then it must launch strategies to win against the competition

1. a good society creates the greatest good for the greatest number of people

goodness measured as utility (the presence of pleasure and absence of pain). utilitarianism says we can calculate what's right by looking at the benefits created by the action and subtracting out the costs. ethical responsibility of a business is to maximize profits for shareholders as the money they make creates the most utility

board of directors

group of individuals who monitor the executive team of the corporation and ensure that those executives are acting in the best interests of the shareholders. US corporate law requires every publicly held corporation to have one. directors, and executives themselves, have a legal fiduciary duty to act in the best interests of the corporation's owners. elected regularly by shareholders.

successful corporate governance

helps ensure that a company knows who its key stakeholders or primary beneficiaries are, and then works to create value for them. strong board of directors to guide decision making and oversee executive team as it formulates and implements strategy. a culture that enables ethical behavior because culture may be the most powerful, yet subtle, form of corporate governance.

how to make a strategy canvas

place various features that customers care about when selecting among various products are identified and placed along the horizontal axis. (can include price, speed, etc) next, company performance is evaluated against these criteria and scored on the vertical axis.

2. limit competitive access to scarce resources

if a monopolist can place a lock on the resources that it uses to produce its product, it can effectively bar competition.

dominant strategy

in game theory, a set of actions that is always played no matter what a rival chooses to do (implicate in prisoner's dilemma)

infinitely repeated game

in real world, most companies are in competition with rivals each and every day, month, or year with no certain end date. even though the games are not played forever, they are treated this way since the competitors repeatedly interact and the ending period is not known. players always believe there is a future so they look for opportunities to get a larger amount of profit over a longer period of time.

agents

individuals or groups hired to administer the property or resources of principals. the managers of a corporation are considered to be agents of the shareholders. agents want to maximize their own utility. that may mean maximizing profit of the corporation, or it may mean engaging in behaviors that increase their income, leisure, power, status, or any other thing they may care about.

why is a strategic group analysis useful?

it identifies the major arenas of competition and who competes directly with whom

why is it difficult for companies to switch strategic groups?

it is difficult for a firm to switch strategic groups once they have built a history in one. this is because companies in specific strategic groups choose particular ways to configure their activities and the activity systems do not change quickly or easily.

other constituency laws

laws that allow the board of directors to freely considers the needs of stakeholders other than shareholders when making critical strategic decisions for the firm

laws vs. ethics vs. values

laws: systemic body of rules that govern society and people ethics: morals that guide people's conduct values: principles and ideals which help people determine what is important

outside directors

members of the board of directors not employed by the corporation in any other role

style

might be the most important way in which abstract shared values become real to members of the organization. the tone at the top matters, more than anything else. behavior of executives provides the most important cue for employees to follow as they try to figure our how they should act at work. moral strategic execs not only walk the talk and act ethically themselves, but they also provide ethical leadership for others to follow

competition under monopoly

monopoly: market of one firm or one highly dominant firm. the basic strategic objective of a monopolist is to reinforce its monopoly

1. monitor and mimic rival behavior

oligopolists try to avoid the negative effects of competition by monitoring and matching rival behavior. this makes norms emerge in competition around particular approaches to the market. beating the norm rarely pays. ex: pricing norms are very common. companies know that they could dramatically cut their prices and pick up market share in the short run, but they realize that this move would be quickly detected and matched, leading to lower profits for all firms in the market. for the good of long term profit, firms usually respond to one another's pricing and product features at levels that are profitable for all. by matching product and service features, oligopolists ensure that they do not fall behind. they protect their profits and command higher margins from the market.

competition under oligipoly

oligopoly: markets of a few firms (usually 2-5), though in some cases the number can be as high as 10. oligopoly designation depends on whether firms in these markets are monitoring and reacting to specific behavior. since firms are locked in tight competition with only a few other firms, they must make their moves carefully, knowing that rivals will detect their actions and respond accordingly.

stock based compensation

payment to organizational members in the form of shares in the corporation. turns managers into shareholders.

1. merge or consolidate markets

since many firms in a market sell a homogeneous product, bargaining power is difficult to obtain. as firms merge, the overall market consolidates, reducing the number of firms and strengthening the bargaining power between the firms' upstream supplier and downstream customers. merging before a competitor does may be a way to obtain advantages in cost (owing to scale) or bargaining power. this could be a way to save firms from obsolescence.

dynamic environments

some competitive markets are very dynamic, with competition constantly changing. companies in these environments must reconfigure their processes and capabilities to emphasize both innovation and speed. without capabilities of speed and innovation, companies in dynamic environments are quickly left behind.

4. develop strategies that cannot be easily copied

sometimes companies are so busying copying competitor's moves that they fail to see how they could do something altogether different. competitive strategy flourishes when companies are doing something unique.

name two frameworks for understanding the competitive landscape

strategic groups and mobility barriers

7 Ss

structure, strategy, systems, skills, style, staffing, shared values

the stakeholder model

the belief that a corporation should be run for the benefit of its entire stakeholder set, with no group enjoying primacy in decision making. because the community grants the corporation the right to exist, managers should run the corporation for the benefit of the community as a whole.

shareholder primacy model

the belief that a corporation should be run, primarily or exclusively, for the benefit of its shareholders. shareholders have a special contract with the corporation because they invest money without specified payment in return. in exchange they receive two property rights.

fiduciary duty

the legal obligation of an agent, a fiduciary, to act in the best interests of the principal, or owner. fiduciary duties include the duty of loyalty, to work for the optimal good of the owner, and the duty of care, to not take undue risk that would jeopardize the principal.

principals

the owners of a resource or piece of property. in the corporation, shareholders are considered principals. principals want to maximize the return on the dollars they've put into a firm; they want the corporation managed in a way that maximizes revenue and minimizes cost, leaving the most profit

corporate governance

the processes and structures that provide the ultimate decision-making authority for the firm

stock option

the right to buy a certain number of the corporation's shares at a specified future date for a specified price

market structure

the way rivals in a market interact and bargain for advantage. in its simplest terms, it's the number of rivals in a particular market. three types: monopoly, oligopoly, perfect competition

how to find nash equilibrium

think through what a player should do under each possible move of the rival. assume players always prefer the better payoff. the intersection (cell) of any choices that are simultaneously preferred by the players of a game.

how to align the agent's and principal's goals?

through compensation and incentives

2. employ tit-for-tat strategies

tit for tat strategies are those that respond in kind to the moves of rivals, including the meting out of punishments for behavior that violates norms (like price wars, lawsuits, etc). because of the threat of this punishment, defections from tacit collusion are rare. when defections do occur, they usually have a signal that communicates the parameters of the action that rivals can easily read (like an end date). this provides an explicit signal to rivals so that they can easily interpret the parameters of the discount and avoid a price war.

3. innovate and patent

to maintain competitive position, a monopolist is often required to innovate and patent. the monopolist and would be entrants are in an innovation race. potential competitors can make a monopolist's products obsolete through innovation, or monopolists can stay ahead by innovating themselves.

3. pursue a differentiation strategy

to separate themselves from the pack, firms can add product features, store locations, bundled services, or other variations to create unique value for customers. this is hard to do in markets where firms sell homogeneous products because the product is usually the same no matter where it is bought. in this case, firms are left to differentiate in other aspects of the buying experience.

prisoner's dilemma

two individuals, prisoner 1 and prisoner 2, rob a bank of $2 million and hide the loot. they have been captured and are being held by police in separate cells. the police believe they robbed the bank, but don't have enough evidence. police decide to separately offer each prisoner the following: "if you implicate your partner, we will give you leniency. if your partner implicates you, you'll get jail time." if neither implicates the other, they both go free. they must make their decision without knowing the choice of their partner. offers a compelling prediction about what happens in real markets when companies have opposing interests key lesson: each player implicates and goes to jail when a much better outcome exists.