Foundations of Strategy

Question 1:
Nash equilibrium is a fundamental concept in theory of games and the most widely used method of predicting the outcome of a strategic interaction in the social sciences. It contains following 3 elements: * A set of players * A set of actions * A payoff function for each player
A pure Nash Equilibrium is an action profile with the property that no single player can obtain a higher payoff by deviating unilaterally from this profile.
Consider a game involving two each with two available actions. If the pick different actions they each get a payoff of 0. If they choose A they each get 2, and if they choose B they get 1. | A | B | A | (2,2) | (0,0) | B | (0,0) | (2,2) |

The action (B,B) is an equilibrium since a unilateral deviation to A by any player would result in a lower payoff for the deviating player. (A,A) is also an equilibrium.
The prisoners dilemma has a similar matrix. Each player improves his own situation by switching from “cooperating” to “defecting” only by knowing that the other players best option is to defect as well. In this case there is only one Nash Equlibrium, with both players choosing to defect. | cooperate | defect | cooperate | (4,4) | (0,5) | defect | (5,0) | (3,3) |

Question 2:
Coordination within the firm is practiced when managers and other members of an organization take up the roles that they have previously contracted to take up in the legitimate system of their organization. The legitimate system consist of a hierarchy, a bureaucracy and an officially approved ideology.
At any one time the hierarchical structure of an organization reflects or embodies its paradigm. Structure is a way of coping with the tension created by the forces of decentralization and centralization. As an organization grows in size and complexity, the tension between centralization and decentralization increases to a point where any existing structural arrangement collapses. The structure then has to be altered in some way and other mechanism, for example temporary project teams have to be added to deal with the complexity. But they in their turn bring further tensions. Such changes and mechanism can therefore only ever provide temporary relief to the tension, soon some other arrangements will be required. Organizational structure is therefore a dynamic evolving mechanism showing itself through dialectical process. In a simple structure it can all be resolved by placing the emphasis on centralization. In this structure, staff and workers report directly to a small number of managers – in most cases one person is very much in control. Because it relies heavily on informal personal contact the simple structure has the flexibility required dealing with rapid change and uncertainty. As the size of the organization expands the loose of the reporting system and the absence of formal control increasingly creates anomalies. The flexibility makes the system good at acquiring new customers but the absence of bureaucracy means that it cannot retain existing ones.
Growth demands the installation of more complex structural forms and more formal systems if control is to be effective. Which is where bureaucracy is required.
Bureaucracy is not always of the evil. Failure to recognize the size limitation of this structural form and the need it imposes for an efficient bureaucracy is perhaps the most frequent stumbling block encountered by the entrepreneurial founders of promising businesses.

Question 3:
Bertrand Competition
Market situation in which each firm and its competitors make their output and pricing decision on the assumption that their competitors will not change their prices from the current level.
Cournot Competetion
Market situation in which each firm and its competitors make their output and pricing decision on the assumption that their competitors are committed to a certain level of production and will readily reduce their prices to achieve that level of sales.

Bertrand criticized Cournots analysis of the competitive process, arguing that firms should be seen as playing a strategy of setting price below competitors prices (Bernard strategy) instead of a strategy of accepting the price needed to sell an optimal quantity ( Cournot strategy).

“One must fashion theory in particular industry to reflect the technology of production and exchange in that industry. For example, competition via sealed bids without capacity constraints fits the Bertrand model nicely, whereas competition to install sunk productive capacity corresponds to Cournot” (Shapiro 1989, p. 351)

Important aspects:

* Production: Flexible versus inflexible supply? (e.g. high MES, high inventory costs, inflexible technologies) * Exchange: Commitment or flexibility in setting the price?

Although both models have similar assumptions, they have very different implications: * Since the Bertrand model assumes that firms compete on price and not output quantity, it predicts that a duopoly is enough to push prices down to marginal cost level, meaning that a duopoly will result in perfect competition. * Neither model is necessarily "better." The accuracy of the predictions of each model will vary from industry to industry, depending on the closeness of each model to the industry situation. * If capacity and output can be easily changed, Bertrand is a better model of duopoly competition. If output and capacity are difficult to adjust, then Cournot is generally a better model. * Under some conditions the Cournot model can be recast as a two stage model, where in the first stage firms choose capacities, and in the second they compete in Bertrand fashion.
However, as the number of firms increases towards infinity, the Cournot model gives the same result as in Bertrand model: The market price is pushed to marginal cost level.

Question 4:
Economies of Scale
The theory behind supply side economies of scale state is that the most efficient level of production in an industry is at the point in which the average total costs are at a minimum. In some industries, this takes a significant market share to attain and if a firm cannot attain this level of efficiency, than the firm’s cost structure is too high and the firm will not be competitive. Demand side economies of scale, or “network effects,” is the theory that the value of a product is dependent on the others using the same product. For example, a competitor to Microsoft’s Excel is highly unlikely to emerge because of the huge network of business consumers that currently utilize the program. Any spreadsheet software that aspires to compete with Excel must be widely adopted by the business community in order to be effective.
Another aspect of Economies of Scale that affects Portes 5 forces is this. The most cost efficient level of production is termed Minimum Efficient Scale (MES). This is the point at which unit costs for production are at minimum - i.e., the most cost efficient level of production. If MES for firms in an industry is known, then we can determine the amount of market share necessary for low cost entry or cost parity with rivals. For example, in long distance communications roughly 10% of the market is necessary for MES. If sales for a long distance operator fail to reach 10% of the market, the firm is not competitive.
The existence of such an economy of scale creates a barrier to entry. The greater the difference between industry MES and entry unit costs, the greater the barrier to entry. So industries with high MES deter entry of small start-up businesses. To operate at less than MES there must be a consideration that permits the firm to sell at a premium price - such as product differentiation or local monopoly.
On of the main critique points of porters 5 forces is that the source of value is structural advantage (creating barriers to entry)
In my view IT does not have a prominent role in Porters forces. As power of information technology grows, all players in a market will have access to far more information. Thus, totally new business models will emerge in which even players from outside the industry are able to vastly change the basis of competition in a market. Those who use the Five Forces Model and who base their thinking on today’s industry structure would never see these changes coming in time. IT was used as a tool for implementing change. Today technology has become the most important driver for change. Digitalization and Globalization are factors that are not taking enough in consideration in Porters world.

Question 5:
Cost Leadership Strategy
The goal of Cost Leadership Strategy is to offer products or services at the lowest cost in the industry. The challenge of this strategy is to earn a suitable profit for the company, rather than operating at a loss and draining profitability from all market players. Companies such as Walmart succeed with this strategy by featuring low prices on key items on which customers are price-aware, while selling other merchandise at less aggressive discounts. Products are to be created at the lowest cost in the industry. An example is to use space in stores for sales and not for storing excess product.
Differentiation Strategy
The goal of Differentiation Strategy is to provide a variety of products, services, or features to consumers that competitors are not yet offering or are unable to offer. This gives a direct advantage to the company which is able to provide a unique product or service that none of its competitors is able to offer. An example is Dell which launched mass-customizations on computers to fit consumers' needs. This allows the company to make its first product to be the star of its sales.
Innovation Strategy
The goal of Innovation Strategy is to leapfrog other market players by the introduction of completely new or notably better products or services. This strategy is typical of technology start-up companies which often intend to "disrupt" the existing marketplace, obsoleting the current market entries with a breakthrough product offering. It is harder for more established companies to pursue this strategy because their product offering has achieved market acceptance. Apple has been a notable example of using this strategy with its introduction of iPod personal music players, and iPad tablets. Many companies invest heavily in their research and development department to achieve such statuses with their innovations.
Operational Effectiveness Strategy
The goal of Operational Effectiveness as a strategy is to perform internal business activities better than competitors, making the company easier or more pleasurable to do business with than other market choices. It improves the characteristics of the company while lowering the time it takes to get the products on the market with a great start. State Farm Insurance pursues this strategy by promoting their agents as "good neighbors" who actively help customers. Strengths and weaknesses in a differentiation strategy: The strength of having a successful differentiation strategy is that the company may charge a premium for its product or service. The company does so with confidence because of a highly developed and strong corporate identity. The company can readily pass along higher supplier costs to its customers because of the lack of substitute or alternative products on the market. Having a loyal customer following helps stabilize the company's revenue and lessens the impact of market downturns because of customer loyalty in good times and bad.
A company that succeeds in implementing a differentiation strategy must worry about competitors' copying its business methods and stealing away its customers. In addition, implementing a differentiation strategy is costly. It may take years before a company achieves a strong brand image that sets it apart. During that time, the company faces the risk of changing consumer tastes or preferences. In such a case, the company may not have sufficient customer demand to offset its higher costs, which may lead to a loss.
A differentiation strategy may not be ideal for every company. It is difficult to maintain differentiation for an indefinite amount of time because of competition. Many companies attempt to find the right balance by competing on such things as price, service and quality, or on any combination of attributes that it believes are important to its customers to gain a competitive advantage. For example, a company that differentiates itself based on price may sacrifice quality to attract customers who are price sensitive. During market downturns, the company may enjoy higher sales than one that competes based on differentiation quality. Strengths and weaknesses in an innovation strategy:
An innovation strategy advantage comes from introducing a new product, service, process, or entering a new market ahead the competition.

There are a number of strengths that come from innovation strategy. The ability to create and protect intellectual property 1. The ability to create a standard and rules of play 2. The ability to capture a market share majority 3. The ability to become the low cost leader 4. The ability to tie up strategic resources 5. Increased switching costs for customers 6. Increased switching costs for producers
However, there are a number of weaknesses too. 1. Higher development costs 2. First to make mistakes from which the competition can benefit 3. Higher development and entry expenses 4. Intellectual property can be circumvented 5. Higher resource expenses 6. Higher risk of missing the product, service, or process expectations of the customer 7. Customers are reluctant to buy when a large switching cost may be incurred
While first-movers are often industry leaders, there are certainly many examples where the "followers" have upstaged their "teachers". Google for example, was not the first-mover when it comes to search engines.

Strengths and weaknesses in a cost leadership strategy
Across industries outsourcing is primarily undertaken to enable companies to generate better revenue recognition and to provide them an added competitive differentiator. While done with the best of intentions, outsourcing has a telling effect on quality of products and services delivered as a consequence of this, either enhancing or lowering quality.
While there could either be an increase or decrease in the turnaround time while outsourcing, it could also result in improved or decried customer service. Outsourcing, primarily undertaken to provide companies the competitive edge, can also result in easier management and better productivity based on how effectively the process in managed.
The strengths of outsourcing
The strengths of outsourcing often positively reflected by enterprises across industries include: * Better revenue realization and enhanced returns on investment * Lower labor cost and increased realization of economics of scale * Tapping in to a knowledge base for better innovation * Frees management time, enabling companies to focus on core competencies while not being concerned about outsourced routine activities * Increases speed and the quality of delivery of outsourced activities * Reduces cash outflow and optimizes resource utilization
The weaknesses of outsourcing
Often weighed with the advantages before any decision on outsourcing is undertaken, the following represents some of the possible weaknesses often dwelled upon: * Possible loss of control over a company’s business processes * Problems related to quality and turnaround time * Sluggish response times coupled with slow issue resolutions * Shortcomings in performance vis-à-vis expectations * Lower than expected realization of benefits and results * Issues pertaining to lingual accent variation * An irate customer base coupled with enraged employee unions