Strategic Management Midterm
Nash Equilibrium
A non-cooperative solution to a non-cooperative game A set of choices such that *no player has any incentive to deviate* (this is why the video from a A Beautiful Mind is NOT a nash equilibrium) a situation in which economic actors interacting with one another each choose their best strategy given the strategies that all the other actors have chosen
Nash Equilibrium - Sequential Moves - Method
*Backward induction:* For each strategy choice, if player 1 (first mover) picks that choice, what would player 2 do to get the best outcome Player 1 then compares the outcomes it would get in each of the situations chosen by player 2 above and picks the best one
Why does old world wine respond poorly to new world?
- Bound by government regulation and tradition - Fragmentation (lack of scale) - New world producers tended to control more of the value chain (*they understand the market more than the old world producers*) Legal issues, cannot water mature vines Not as much land to grow Tradition
Why might we expect global competition to the Swiss in watchmaking?
- Largely homogeneous preferences (time is a "universal language") - Ease of transport - Economies of scale (a proportionate saving in costs gained by an increased level of production) - Costs a lot! Ripe for cost reduction
Takeaways from Swatch case
- National competitive advantage arises from both innate country-specific factors (like the jewelers that moved to Switzerland) and subsequent innovations (such as the guilds) - Industry/product characteristics may make global competition inevitable (we saw this with watches and their small size making them easily transportable) - Globalization can bring dramatic shifts in an industry (we saw that with introduction of Timex and Seiko and other players into the industry that changed the shape of the industry) - Past successes don't always equal future successes
What factors explain the changing leadership (among the Swiss, Japanese, and Americans) in the global watch industry?
- growing global competition - innovative technology/cost reduction strategies - changing consumer trends which firms were able to capitalize on these changes faster and better
What could BSB have done to be more proactive in defending against Sky?
- secured film rights sooner - more aggressive marketing - more aggressive launch schedule - better planning for technology
•What about Game Theory as we have discussed it?
AS WE HAVE DISCUSSED IT: game theory is fundamentally about competitive responses to what one perceives to be others' available actions however, it is important to note that there are many other uses for game theory - all of the markets are typically known in advance and you are picking from many choices
New world wine regions
Argentina Chile Australia South Africa USA
Demand conditions- Swiss watches
Centralized location Need to keep good time
How "attractive" was OW wine-making industry? (assume wine-making part of value chain is the "industry")
Entry threat: low - classification system made it tough Supplier power: low Threat of substitutes low - wine was heavily ingrained in culture! Buyer power: high (very fragmented industry, lots of choice) Rivalry: moderate - lots of producers, but differentiated by classifications.
What does 5 forces exclude?
Environmental forces - economic trends like globalization and rapid technological advances that weren't as prominent when Porter devised his framework.
Are there elements of this case that apply to the emergence of smartwatches? (discussion question)
Lower cost production: Smartwatches used innovation to include technology Mass production in low-cost labor countries
Nash Equilibrium - Simultaneous Moves - Method
Method of iterated strategies: 1. *dominated strategy* For one player, if one strategy (irrespective of the other player) is better in every case than another strategy, completely cross out (disregard) the worse strategy 2. *dominant strategy* For the other player, considering the remaining options, if one strategy (irrespective of the other player) is better in every case than the other strategy, pick that column/row and find the Nash Equilibrium within but only works once you rule out a row/column per step 1
How did Seiko become a leader?
Quartz replaced movements and were easy and cheaply put in watches Mass production/mass distribution engaged in heavy level of vertical integration (owned most of the value chain) Tariffs (Japanese had strong gov philosophy for tariffs to promote their own industries) Eventually moved to lower cost countries in Asia for production
Why did the Swiss not respond?
Reluctance - worried about prestige being tarnished - didn't want to layoff workers Fragmentation - Swiss guilds made it hard to change - Low volumes --> had less incentives to innovate Did not take competition seriously
*Intra industry rivals*
Rivalry among firms already in the industry •Lack of dominant firm(s) •Firms highly committed to industry •Exit barriers high •Firms do not know rivals well
Blue Ocean vs. Game Theory
Similar to game theory, blue ocean focuses on strategic moves BUT many differences Game Theory - all of the markets are typically known in advance and you are picking from many choices Blue Ocean - firms seek to create and compete in uncontested "blue ocean" market spaces
Factor conditions- Swiss watches
Skilled craftsmen Farm labor
Why should BSB have seen Sky coming?
Sky had substantial resources and capabilities that were relevant - 2nd largest media conglomerate - prior experience with satellite TV - cash - 20th century fox library - owned 1/3 of British newspapers (meant that they had the advertising power to promote this new type of TV service) Rupert Murdoch - had a "chip on his shoulder" to bring "normal" TV to masses -------------------------------------- lots of acquisitions and creation of better content Had rupert murdoch working for them (FOX)
Supply side economies of scale
average production/service costs per unit decrease as the scale of production or consumer base increases, may not be sustainable after a certain size --> entrants either have to come in at a large scale or accept a cost disadvantage
Threat of forward integration
The power of a supplier is enhanced if there is a credible possibility that the supplier might enter the buyer's industry. (if they get experienced at supplying for your industry they might just enter the industry themselves)
Threat of backward integration
The power of buyers is enhanced if there is a credible threat that the buyer might enter the supplier's industry. EX: big auto producers and major buyers of cars often use the threat of self manufacture as a bargaining lever
Value Chain
The set of activities through which a product or service is created and delivered to customers. can be adapted to whatever industry you're looking at
Timex becomes leader how?
They began using hard alloy rather than jewels in movements (Cheap parts) Low cost manufacturing sites (Cheap watches) Innovative marketing and distribution - marketing: "took a licking and kept on ticking" and "torture tests" - distribution: disposable aspect of watches allowed new distribution channels like drugstores ---------------------------------- Cheap parts Cheap watches Good design
Porters 5 forces - wine industry
Threat of Entry •Capital requirements -- capital investment low •Access to distribution -- Access to industry distribution channels is difficult for lower segments of the wine market but very accessible by brands in the higher market segment •Switching costs of customers --Switching costs are minimal Bargaining Power of Buyers -- The bargaining power of buyers is great because the industry is marked with oversupply with consumption (demand) lagging way behind production. Bargaining Power of Suppliers -- The suppliers outweigh the buyers thus given them little or no bargaining power -- Buyers (wineries) integrate backwards into supply Threat of Substitutes -- The threat of substitute products like beer and spirits pose a threat to the industry -- The price of wine's substitutes are relatively cheaper "while all income levels consumed wine, higher income was associated with greater wine consumption" -- No switching costs Intra industry rivals -- The intensity of rivalry between competitors in the industry is moderate because it is made up of a few dominant competitors --> Rivalry was lessened because some competitors were able to differentiate their products --> The fact that there was no switching cost and that sales depended either on price or marketing for the lower and higher segments respectively, increased rivalry
first-mover advantage
When the final outcome chosen in the sequential move method leaves the first mover with a better outcome Does this always happen? No, there are second mover advantages too
How were the New World producers able to expand their market share so rapidly in the 1990s?
Without the constraints of regulation, New World producers used innovative grape growing practices that were prohibited in France by the AOC --> the innovations gave them a cost advantage They also innovated packaging and marketing that provided cost savings and attracted a new consumer base Lastly, they controlled every part of the value chain which allowed them to extract margins in each stage and retain bargaining power with the concentrated retailers
Switching costs of customers
entrants have to spend heavily to overcome customer loyalty
Exit barriers high
ex: Airline Industry --> hard to get out of industry bc you have expensive assets laying around that must be utilized to amortize the costs incurred and have to figure out a way to get rid of them
Demand side network effects
ex: the use of Microsoft word --> demand increases the more users there are of the product
Supplier concentration
how many suppliers there are. High concentration = few suppliers --> when there are few suppliers thats a threat to your industry bc they have power) A supplier group is powerful if it is dominated by a few companies and is more concentrated than the industry it sells to
Low switching costs
if products are standardized, buyers can easily switch to another brand
Low switching costs to substitute
if products are standardized, ppl can easily switch to another brand making it difficult for new entrants to gain market share
Buyer concentration
if purchasing is concentrated in the hands of a few buyers they have power over you
Supplier not reliant on the given industry
if the industry is not an important customer of the supplier group then the supplier doesn't feel the need to protect the industry through reasonable pricing or assistance in activities like R&D and lobbying
Price-sensitive buyers
if they are turned off by high prices, that puts downward pressure on your prices that any industry player can offer
Two types of time in game theory
simultaneous sequential - one after another
Why are some industries more profitable than others?
some firms are in better geographic locations than others some industries have firms that are very capable --------------------------------------------- Supply and demand Economies of scale Barriers to entry *Environmental factors*
Lack of dominant firm(s)
suggests there will be a lot of rivalry among equally powered players
Access to distribution
the new entrant must secure distribution of their product or service EX: new food product must displace others from the supermarket shelf via price breaks, promotions, intense selling efforts, etc. Sometimes this barrier is so high that a new entrant must create its own distribution channel to surmount it (ex: Timex in the watch industry in the 1950s)
War of Attrition
when two (or more) firms compete with each other, each one losing money but hoping that the competitor will eventually give up and exit the industry.
BSB and Sky merger update
•Sky got rid of most BSB assets •Employees •Technology •Sky kept some BSB programming •Despite this, BSB's share of merged entity nearly 50%! •Sky, in effect, paid BSB "not to play"
The ironies of change in the wine industry
•The same tradition, regulation, and legislation that created and sustained the OW market hurt OW producers in the NW market. •Low-end wine was replaced by "connoisseur" wines in OW, but low-end wine started the fierce battle in NW markets (e.g., U.S.). •NW producers much more responsive in evolving market ... despite the fact they were much larger!
Porter's Diamond Model
-*factor conditions* Factor conditions are those elements that Porter believes a country's economy can create for itself, such as a large pool of skilled labor, technological innovation, infrastructure, and capital. -*demand conditions* Demand conditions refer to the size and nature of the customer base for products, which also drives innovation and product improvement. Larger, more dynamic consumer markets will demand and stimulate a need to differentiate and innovate, as well as simply greater market scale for businesses. -*related and supporting industries* Related supporting industries refer to upstream and downstream industries that facilitate innovation through exchanging ideas. These can spur innovation depending on the degree of transparency and knowledge transfer. -*firm strategy, structure, and rivalry* Firm strategy, structure, and rivalry refer to the basic fact that competition leads to businesses finding ways to increase production and to the development of technological innovations. The concentration of market power, degree of competition, and ability of rival firms to enter a nation's market are influential here.
Competitive Advantage example: Silicon Valley
-firm strategy, structure, and rivalry Rivalry among internet startups in silicon valley -demand conditions Highly sophisticated consumers in silicon valley and US in general -related and supporting industries Wide variety of tech industries in silicon valley (e.g. internet, semiconductor, biotech) -factor conditions Huge pool of engineers in silicon valley Technology park infrastructure
•Are Porter's 5 Forces, or Diamond Model, fundamentally about creating new markets? Why or why not?
5 forces: Porter's Five Forces is a framework for *analyzing* a company's competitive environment. Diamond model: Porter's Diamond Model of National Advantage *explains* why some industries in some countries are so much more developed and competitive compared to industries elsewhere on the planet. The factors in these models can be used to analyze markets, but they are not *fundamentally* about creating new markets???
How should the Australians/Americans/French respond to their situation?
?
Firms do not know rivals well
? unable to strategically compete ?
Firms highly committed to industry
? when industry gets crowded --> intense competition, price wars, company failures ?
In what ways have we seen new markets created?
A few examples: Cell phones Virtual reality Cloud storage Online marketplace Electric cars Social media
How are new markets created?
A few examples: •Overlooked segment in population •Unforeseen bridge between 2 markets •Addressing new demand
What is comparative advantage?
An advantage that you personally have always had ------------------------------------------------------ the ability of an individual or group to carry out a particular economic activity (such as making a specific product) more efficiently than another activity. ------------------------------------------------------ French Wine Industry: - culturally imbedded high demand - Better region to grow (soil, climate, etc.) - grape growing experience - long tradition of wine making skill (skill from generational families) - government support
What is a competitive advantage?
An advantage you had to work to get Inventions that came along in more recent times ------------------------------------------------------ a condition or circumstance that puts a company in a favorable or superior business position. ------------------------------------------------------ French Wine Industry: - created "fine wine" segment (niche market) - negociant (ppl who take the wine and have all the knowledge about how to get it from one place to another considering tariffs, regulations, etc.) - bottling -- cork, pasteurization - classification system (called AOC in France) --> simplify producer complexity --> provide quality
Blue Ocean Strategy
An approach where firms seek to create and compete in uncontested "blue ocean" market spaces, rather than competing in spaces and ways that have attracted many, similar rivals.
•Let's suppose A decides to go for the island, and B now knows of the island and A's presence there. •Fighting is bad for both, but suppose A would likely retain the island in a battle. •What should Tribe B do?
Attacks tribe A!
2. What might BSB have done differently before Sky's entry announcement? Following the announcement?
BSB could have taken several steps to limit the entry of Sky TV within the industry or it could have at a minimum, reduced the impact of its entry on itself. Costs of production could have been saved by BSB by securing and investing in movie rights before the entry of Sky. The management of BSB should have lobbied for preventing the PAL technology of Sky after the launch of the company because BSB was already sinking close to around 1 billion in the D-MAC technology and no country would want its shareholders to lose that amount of money. BSB also did not de-risk their technology strategy by not preventing PAL. BSB should have sustained the option of using PAL and it should have set up options for itself in multiple technologies for the satellite.The way of controlling the costs for BSB was also way more extravagant as compared to the pragmatic way of Sky TV. One example for this is that BSB had hired people and had employed them within its luxury headquarters resulting in 500 million pounds of startup costs whereas Sky TC had leased its headquarters within the industrial suburb of London and had paid only 100 million pounds as the startup costs. Soon after the announcement by Murdoch, the BSB managers should have run out of the business to minimize their losses because Murdoch was penetrating with a much cheaper technology, however, BSB behaved on the contrary at that time and faced huge losses.
What did sky do?
Bought 50% of their shares, took control and then trashed their assets
credible commitment
Burn boats The first party takes an uncooperative action because it knows the second party will take an uncooperative action later. a choice or a restriction of choices that guarantees a player will take a particular future action if certain conditions occur
How were the French able to dominate the global wine industry for centuries?
By capitalizing on a "premium image"
*Threat of new entrants*
Coming into the industry, perhaps from another industry (barrier to entry) •Capital requirements •Non-size benefits of incumbents •Access to distribution •Supply side economies of scale •Demand side network effects •Switching costs of customers
Red Ocean Strategy
Compete in existing market space; beat the competition; exploit existing demand; make the value-cost trade-off; align the whole system of a firm's activities with its strategic choice of differentiation or low cost. cut-throat competition Simply try to increase your profits Reduce your costs
Game theory is fundamentally about
competitive responses to what one perceives to be others' available actions
Diamond Model vs. Game Theory
Diamond model compares different industries (i.e. two countries), as opposed to game theory which goes deeper and can examine strategic moves between players within one industry (i.e. two firms)
3. What should BSB do in 1990? In particular, what share of a possible merger pie would you hold out for, as BSB?
If a Cartel (an association of manufacturers or suppliers with the purpose of maintaining prices at a high level and restricting competition) is formed by both the companies, then it would be possible for BSB to have a 40% to 50% approximate share of the market.
Provide differentiated good
If the good is differentiated, the supplier does not have to contend with other products for sale in the industry
Rise of new world producers
Grape growing: - cheap land --> scale economies - consistent growing climate - technological (trellis, mechanical harvesting, irrigation) Wine making: - ability to experiment - New technology (reverse osmosis, steel containers) Marketing: - classification --> variety of grapes - Simpler branding Distribution: - Shipping cost disparities disappeared - "Wine in a box"
value chain in the wine industry
Grow grapes --> Make wine --> Distribution --> Marketing --> Retail
Firm strategy, structure, and rivalry- Swiss watches
Guild (Watch unions) Watchmaking academies (Schools for makers)
In what ways is the watch industry global? Compare and contrast the drivers of the watch industry with those of a multi-domestic industry, for example bakeries. What is the globalization potential of bread, and how does this differ from watches?
Firms should produce where they can benefit from favorable supplies of resources. Watch companies can outsource their production to locations separate from their consumer markets to capitalize on low production costs, then transport the finished goods to the end consumer. A key feature of recent internationalization has been fragmentation of the value chain --> the benefits of fragmenting the value chain must be traded off against the added costs of coordinating globally dispersed activities The localized nature of bread eliminates its potential for globalization. Alternatively, the watch industry is highly mobile. - for bread, both internationalization and foreign direct investment are low - for watches, both internationalization and foreign direct investment are high
Old world wine regions
France (focus) Italy Spain
*Threat of substitutes*
From other industries •Good price/performance tradeoff •Low switching costs to substitute
*Bargaining power of buyers*
Generally consumers, but can be firms - the ability of buyers to affect the price they must pay for an item •Buyer concentration •Threat of backward integration •Low switching costs •Price-sensitive buyers
The Rich Island •Tribe A and B are equal strength. •A discovers there is an island full of riches, and it is only a matter of time before B discovers it. •What should Tribe A do?
Go to the island! Take it!
How did Swatch manage to succeed given this prior history of leadership in the global watch industry?
Hayek realized that no one doubted the quality of Swiss watches, but the industrial landscape was chaotic and it ignored the changing global environment. He decided that the customer had to be sold on the idea of wearing a watch as a personal statement. Hayek invested heavily in automation and standardization of parts and tooling. This produced an economy of scale and improved quality. Production was centralized, and parts were designed to be interchangeable. In order to control how the Swatch was marketed, Hayek began selling through his own branded Swatch stores. Hayek's three professed principles were to deliver promptly on promises, to avoid layoffs and to make certain that his employees trusted the quality of leadership coming from management. He believed that management decisions needed to be transparent, clearly understood and decisive. In order to recapture Switzerland's dominant position, *Hayek knew that he had to retain manufacturing know-how and that meant not losing skilled workers through layoffs* which would risk demoralizing the whole operation. *Hayek's product that allowed him to keep his factories running while he reoriented the company was the low-cost Swatch.* The watch had already been under development as a "slim line" watch when he joined the company, but the plan had been to sell the mechanism to other companies which would then resell it under their own brand. Instead, Hayek decided to take over sales directly and to brand it as the Swatch. By getting into the mass-market trenches, Hayek argued, the company could reassert control over the lower end of the market. He felt that that was an essential step to maintaining corporate vitality and creativity.
How did Swatch regain leadership? (e.g. what was it about Hayek that enabled him to turn things around?)
Hayek: - Not from watch business (background in consulting and engineering) - freed his thinking - He had lots of money (made a big personal investment) Swatch: - Manufacturing: --> Reduced part count --> Increased automation (wanted to retain "Swiss made" label) - Marketing: --> Lifestyle product (fashion statement) --> Swatch stores
Why (with the projections) did BSB and Sky have such a costly and lengthy fight?
High up front investment to get into the business so given the relative small size of continuing in the business you are likely to want to persist to recoup some of the up front cost high strategic stakes emotional component uncertainty as to what might happen
How did watch industry begin in Swizerland?
Huguenots: made a clever pivot from making jewelry into making watches (had all the tools from making jewelry but watches had a purpose) Location specific factors: - Farmers who need winter income - center location for trade - Competition that promote innovation Initiatives of Swiss Firms: - Guilds (industry association that enabled watchmakers to band together and supply each other parts) - coordinated buying - watchmaking schools - "Swiss Made" branding - Upscale distribution channels - Manufacturing innovation (machine tools) ------------------------------------ Have been the same for 500 years
How did new world benefit from controlling value chain?
In old world, marketing was done by negociants which implies that old world producers did not "see" the consumers (didn't know what they wanted) --> more prone to making mis-steps in distributing and marketing their wines Greater share of the profits Better understanding of the customer, because we knew them from start to finish
takeaways from wine case
Industry structure is not static --> may change through the actions of firms or new entrants Change in industry structure may render previously good strategies ineffective --> ex: a good strategy in old world wine making might have been to play up the tradition of the wine which does not carry as much weight today Competitors, who they are, not just how many, matters a lot!
Why were the french wines so successful?
Initially, Chinese valued status/image over quality Wealthy chinese ppl wanted to buy them in order to brag What happened later, what can we learn from this? As market evolved, value/quality took over
5 forces in the ride sharing industry
Intra Industry Rivalry: High Threat of entry: ~Low Buyer Power: Lyft and Uber (the fact that there are two alternatives) strengthens buyer power Supplier Power: Suppliers = drivers: low power, car makers: ? Threat of substitutes: Depends on where you are (ex: public transportation)
Analyze the wine industry. Is this an attractive industry? What is the basis for competitive advantage?
Is this an attractive industry?: Prob not in todays society changing consumer demands/preferences/environment lots of competition The key success factors facing the wine industry: - Establish an existing domestic market position - Establish economies of scale and underlying cost structure benefit - Manage adaptability to industry changes - Attract foreign investment ------------------------------------------------------ What is the basis for competitive advantage?: Majority of the New world countries have a strong prospective toward attraction of foreign investments. --> large foreign investments enable significant production expansion and export of quality wines Also economies of scale and economies of scope in marketing offer a strong advantage to the United States because it is a populous and affluent nation. Economies of scope focuses on the average total cost of production of a variety of goods, whereas economies of scale focuses on the cost advantage that arises when there is a higher level of production of one good On the other hand, countries like France and Germany; though they have large domestic markets, there is little possibility for growth. The concentration of production into small wineries, scarce land and labor, complex labelling practices and inability to leverage new production techniques have left them with a weak competitive advantage.
High switching costs
Locking in customers by making it difficult or expensive for customers to move to another product When a buyer's product specifications tie it to particular suppliers, it has invested heavily in specialized ancillary equipment or in learning how to operate a suppliers equipment (ex computer software), or its production lines are tied to the manufacturing facilities (as in some manufacture of beverage containers)
Related and supporting industries- Swiss watches
Jewelry shops Machine tool industry
Who is the father of game theory?
Jordan Nash
Is there always a Nash Equilibrium?
No, could be 0, 1 or more
Why was it easy for others to make watches?
Not many barriers to entry, cheap to export
Porters 5 Forces
Own industry: (1) *intra-industry rivalry* among firms already in the industry (2) *threat of entry* by firms new to the industry (perhaps from other industry) Other industries in value chain: (3) *supplier power* (4) *buyer power* (often individual consumers, but could be firms) Other industries outside value chain: (5) *threat of substitutes*, i.e., products from outside the industry ------------------------------------------------------------- Intra industry rivals Threat of new entrants Bargaining power of suppliers Bargaining power of buyers Threat of substitutes (threat of substitutes: be careful! red wines are not a threat to white wine bc both wine industry. beer, on the other hand, can be a threat to wine) *understand the reasoning behind each of the effects...
How did Porter arrive at his "diamond" theory
Porter saw something missing in existing explanations: •Factor costs (e.g., labor, land) don't explain US, Germany, Japan (video) •Macroeconomic variables (e.g., exchange rates) don't explain Japan, Italy, South Korea •Government policy has a highly mixed record Porter's reaction to this: *A nation may provide an "environment" conducive to the development of an industry*
*Bargaining power of suppliers*
Power that the supplier can leverage •Supplier concentration •Threat of forward integration •Supplier not reliant on the given industry •High switching costs •Provide differentiated good
Swatch update
Still manufacturing in Switzerland Holds virtual monopoly in watch movements
Good price/performance tradeoff
Substitute products place a ceiling on prices that can be charged and limit the potential of an industry unless it can upgrade the product or differentiate it somehow --> The more attractive the price-performance trade-off offered by substitute products, the firmer the lid placed on the industry's profit potential Substitute products that deserve the most attention strategically are those that: (a) are subject to trends improving their price-performance trade-off with the industry's profits or (b) are produced by industries earning high profits
Non-size benefits of incumbents
barriers that have nothing to do with the size of the existing firm. EX: brand awareness of some product that has garnished a good reputation
can you think of products associated with one country?
cars & Germany cigars & Cuba flowers & Netherlands fashion & France
Capital requirements
deters entry if it is expensive to join
Game Theory Assumptions
•Who are the players? -- E.g., CCE's competitors in nearby states •What are strategies available (one's own and others)? •What information is available? -- Full information is a simplifying assumption. •Timing -- simultaneous or sequential?