Foundations of Corporate Success: How Business Strategies Add Value - Essay Example

? Strategic Management College: Question one a) Yes, cooperation in a finitely repeated game can be sustained in a sub-game perfect Nash equilibrium, for instance, if the stage game has many Nash equilibria, if uncertainty about players’ preference exists, or if the number of times to be played is not common knowledge (Norman, 2011). In addition, when players have other regarding preferences, cooperation can be sustained. b) No, every Nash equilibrium is not sub-game perfect in an extensive form game, but the other way round. Nash equilibrium is a sub-game perfect if its restriction to every sub-game is Nash equilibrium of the sub-game. This is because every finite extensive form game contains at least a sub-game perfect equilibrium. For example, by applying backward induction it can be proved that the strategy combination comprising of the Nash-equilibrium contours of all sub-games is apparently sub-game perfect. c) Yes, after iterated elimination of dominated strategies in two player games and only one strategy survives, then the strategy combination must be a Nash-equilibrium. This is because the strategies match up to rationalizable strategies. Indeed, no pure strategy that is persistently strongly dominated can comprise of a Nash-equilibrium. Non-recursively weakly dominated strategies can comprise of a Nash-equilibrium and so the iterated elimination may remove one or more Nash equilibria. It can then be shown that one Nash-equilibrium will survive the iterated elimination of weakly dominated strategies. Question two a) Extensive form of the game Rating profits on a scale of 100 for best, payoff for the incumbent are 100 if the entrant fails to enter, 50 if he enters and shares the market and 0 if he enters and the incumbent starts a price war. The entrant payoffs are 0 if he does not enter, 40 (profit – entry cost) if he enters and -10 if there is a price war. The game can be presented in an extensive form as illustrated below: War (-10, 0) Enter No (40, 50) No (0, 100) In the figure, the entrant’s choice is indicated at node 1 and the incumbent’s choice is indicated at node 2. The numbers at the right side indicates the payoffs with entrant’s payoff first. Therefore, the entrant will need to think strategically or to anticipate how the incumbent responds if he decides to enter. Normal form of the game In normal form of the game incumbent strategies are contingent strategies: If the entrant enters then accommodate and if he enters then initiate price war. The entrant’s strategies are enter and do not enter. The game in normal form is indicated below: Incumbent If the entrant enters, then accommodate: if the entrant does not enter, continue with the usual business If the entrant enters, then initiate prices war; if the entrant does not enter continues with the usual business. Entrant Enter 40, 50 -10, 0 Do not 0,100 0,100 b) Pure strategy Nash equilibrium Incumbent If the entrant enters, then accommodate: if the entrant does not enter, continue with the usual business If the entrant enters, then initiate prices war; if the entrant does not enter continues with the usual business. Entrant Enter 40, 50 -10, 0 Do not 0,100 0,100 Enter and accommodate is a pure-strategy Nash equilibrium. c) The sub-game perfect outcome is the Nash equilibrium in the simultaneous move game, which is (no entry, business as usual). Question three Due to Nash equilibrium, pricing strategies that appear to be super-competitive can in fact be anticompetitive. The market strategies for all players respond to the Nash equilibrium. This is best explained by an example. Suppose that the monopoly price for gaming consoles is $200. Now suppose firm A advertises that if a consumer buys a console from him at $200 and discovers that he/she can buy it cheaper at B, A will refund the full purchase price. Again suppose that B does the same thing. It can then be shown that it is Nash for both firms to charge $200. Question four Glaxo and EMI developed important innovations in the 70s, but succeeded differently in marketing the products. For both firms, the choice of markets was not a problem. Their innovations suggested the markets. The major worry for both firms was issues to do with their business strategies. Market selection identified customers, suppliers and competitors. Relationship with suppliers was not of special interest to either firm, but relationships with competitors and consumers were important. EMI tried to build its distribution network in United States and to price its products at a level designed to recover development costs. However, the US president enforced a ‘certificate of need’ condition on public hospitals due to his concern about increasing medical bills. This delayed EMI sales while GE introduced its own substitute products, sweeping away EMI. However, for Glaxo market and innovation followed each other interchangeably. Patent protection which was not effective in the case of EMI served Glaxo well ensuring a sustainable competitive advantage. By any standards, the firm emerged to be an extremely successful European firm Question five The control held by a monopolist in the manufacture and sale of a durable good is quite substantial, though significantly less than that of a monopolistic who manufactures non-durable goods. This producer and seller of durable goods face the challenge of time inconsistency when making the decision of his optimal production path. For the monopolist of durable goods, the credibility problem is centered on whether or not he can be able to commit to a future plan of production. If he increases his future production, the seller provokes a reduction in the capital value of the goods sold before; a fact that consumers take into account. Consequently, the time path of prices deviates away from that which could have emerged if it was possible to commit to future prices. This generates sales that maximize the current value of the profits. Kirkwood (2004, p.366) suggest that durable goods monopolistic could employ leases to earn profits that would not be earned if he sold the durable instead. If the lease terms are suitably short, then it is in the interest of monopolist to maintain the monopoly price since its behavior will affect the expectation of the lessee concerning the future. Effectively, the durable is taken back to the monopolist at the lease expiration. Therefore, it is the monopolist that incurs the infra-marginal loss if output is increased. In conclusion, short-term leases can allow a monopolist of durable goods to credibly commit to sustaining the monopoly price and output. Question six First mover advantages can be achieved by a firm under three situations: technological leadership, preemption of scarce resources, and when switching costs and consumer choice are under uncertainty. When a firm has an edged advance in its R&D as a result of advanced technology, a learning curve can offer sustainable cost advantage if kept proprietary. First movers are also in a position to buy assets at cheaper prices than those that prevails as competition increases. Late entrants are required to invest heavily in order to attract customers and diffuse the switching costs perceived. Buyer choice uncertainty makes buyers stick to the brands that are introduced first in the market. First movers experience several disadvantages. First, they experience free-rider effects in that late comers are in a better position to formulate strategies due to the market knowledge they acquire from first movers. Second, first movers are faced with the challenge of dealing with new market risks and technological uncertainties that follow. Third, first movers are exposed to changes in technology and customer needs as they are not adapted to the actual business environment. Finally, first movers experience incumbent inertia, that is, they are not flexible to new market challenges especially those that have strictly fixed assets. Question seven The three important mechanisms through which the firm can build, spread and maintain reputation are: stakeholder management, information system management and corporate social responsibility. In stakeholder management, the firm can influence reputation by creating a positive relationship with the stakeholders. For example, the firm can be transparent in its accounting practices and create trust among the stakeholders. For information system management, the company can create online reputation through the use of customer feedbacks. For corporate social responsibility, a firm shows commitment to the welfare of the society and thus creating a sustainable reputation. For instance, the firm may engage in environment protection initiatives that benefit the society at large. Question eight Advertising is one method many firms have been using in signaling. It is an effective means of conveying low cost information to consumers. This method ranges from television commercials to face-to-face sales pitches. While the approach seeks to persuade consumers as much as everything, it also offers low cost information. Usually, consumers engage no action, need no search effort and incur no cost. Indeed, the information comes to the buyers. Branding plays key roles in business. The first role is to create brand royalty which refers to the buyer commitment to firm’s products. Brand royalty has not only been associated with competitive advantages, but also influence the attainment of long-term goals. Sellers also give signals by establishing recognized brands. This may be accomplished via advertisements as well as consistent provision of high quality good over duration of time. Consumers who are less informed use the brand to signal product quality particularly when it is attached to fresh goods. Question nine When British Airways ran into heavy losses, the government responded by appointing a new chairman, John King, a businessman with an abrasive reputation (Kay, 1993). He recruited a chief executive who had experience and substantial success in marketing. The new management was tasked with the rationalization of the airlines operations. Both route networks and manpower were cut substantially. Eventually, the state owned entity was sold to the public and was very successful among the European airlines. The distinctive capabilities that yielded competitive advantage were centered on the group of markets in which British Airways operated. These are markets for business trips for which the business is valuable. The customers are most likely to value the brand. The competitive advantage for British Airways was slight, but often appeared attractive to airlines to focus specially on business travelers. The firm combines leisure and business travelers to give better value for money to its business passengers. References Kay, J. 1993. Foundations of corporate success: How business strategies add value. London, UK: Oxford University press. Kirkwood, J. B. 2004. Antitrust law and economics. London, UK: Emerald Group publishing. Norman, H. 2011. The impact of the termination rule on cooperation in prisoner’s dilemma experiment. 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