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8/8/2019 Me Slideshow Global
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ManagerialManagerial
Economics:Economics ofEconomics:Economics ofStrategyStrategy
ManagerialManagerial
Economics:Economics ofEconomics:Economics ofStrategyStrategyEconomics of StrategyEconomics of Strategy
Patrick McNuttPatrick McNutt
www.patrickmcnutt.comwww.patrickmcnutt.comAbridgedAbridged ©©
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Workshop Lesson plan«. Day 1: Introduction and setting the scene using
McNutt·s E-book
Focus: Type, signalling and strategy Plan is to follow Besanko·s Textbook .. Day 1 & 2: Progress into Ch 2 to Ch 4 and Ch 5 Day 1Workshop Study Groups & Case Analysis Day 2 & 3: Focus on Chs 6 to 9 and conclude with
Ch 10 and 11 Advise Part III for post-Workshop reading
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At the frontier«.. Understand management as ¶they are· not as theory hitherto
¶assumed them· to be Management can be ranked (by type) and are faced with
trad
e-offs => something must come ¶top of the menu·
Firms are conduits of information flows (vertical chain) Reducing price does not necessarily lead to an increase in
revenues (elasticity) Prices are primarily signals (observed behavior) Companies understand the competitive threat as
interdependence (zero-sum)
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Players? Principal-agent relationship Shareholders as principals and
management as agents Who are decision makers?
Management § firms § companies
=PLAYERS
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Costs of not being a Player Agency costs across the
shareholders (esp institutional)
Bounded rationality and opportunitycosts with trade-offs Make or Buy dilemma
FMA Follower status ¶behind the curve·
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The competitive threat! Traditional Analysis is biased
towards answering:
what market are we in and how can wedo better?
Economics of strategy (GEMS) asks:
what market should we be in?
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Bridging Unit 1 and Unit 3:
Strategic analysis Binary reaction;Will Player Breact? Yes or No?
If YES, decisionmay be parked
If NO, decisionproceeds on error
Surprise
Non-binaryreaction: Player Bwill react.Probability = x%
Decision taking onconjecture of likelyreaction
No Surprise
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Type of Management Maximise shareholder value, meet
the profit constraint
McNutt E-book Ch 1 Managerial discretion Managerial limitations and Penrose
effect Simon·s Bounded rationality
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Game type and signalling Decisions are interpreted as signals
Observed patterns
Recognition of market interdependence(zero-sum)
Price as a signal v Baumol model of TR max
Scale and size: cost leadership Dividends as signals v Marris model
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Precis on a Marris model« McNutt Ch 4: Understand balanced
equation gc = gd to identify parameters ofprofitability
Supply of capital: debt v equity Demand for capital: R&D exp v dividends Instrumental variables influencing growth
² visit Diageo case in Kaelo v2.0
KFIs: profits/output and output/capital Tobins q and Marris v ratio
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Figure 5 Marris¶ Trade-off
U 1 U 2 U 3 U 4
V aluation ratio Shareholders perference
x
Best to m anagem ent
V 2 V aluation curve
G 1 G 2 G row th rate
V 1
V (m in)
y
0
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Unit 2: Cost leadership as a type Profitabiltiy v scale and (size and scope)
Production as a Cost-volume constraint
Understanding the economcis ofproductivity as exemplar for incentives
Normalisation equation
Excess v reserve capacity [next slide]
Cost leadership checklist
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£
Q0,0
SAC1SAC
2 SAC3LAC
q1q2
Lower per unitcost for more units sold
qt
Current plan of plantclosures to lower costbase not completed
Av.Cost = marginal cost
Production has to determine demandto attain cost leadership
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Bridge Unit 1 and Unit 2 Shareholder as principals expect max value
Management to minimise the agency costs
Positive Learning Transfer, PLT Nomenclature on type: Baumol type, Marris
type.
Cost leadership type (link into Ch 11 onstategic cost advantage)
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Unit 3 Game Dimension What is a game ² loss of independence?
Action, Reaction and Reply
Non cooperative sequential games Introduce oligopoly and n < 5
Single shot price reduction: (i) fail TR testand revenues fall; (ii) near rival misreadsthe price as a signal
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Describe game dimension Players and type of players Prices interpreted as signals
Patterns of observed behaviour Leader-follower as knowledge Accomodation v entry deterrence
Reaction, signalling and ¶best you cando, goven reaction of competitor·
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Type of Players Incumbent type v entrant type Dominant type v monopoly incumbent
De novo entrant type and geographyof the market
Potential entrant type and the threat
of entry Newborn players
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Limit Pricing Model Outline the game dimension: dominant
incumbents v camuflaged entrant
type Define strategy set for incumbents Allow entry and define the equilbrium
Preference - entry deterrentstrategy v accomodation [next slide]
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1
2
Enter
0,10
-7,2
5,8
Do Not Enter
Agressive
Accommodating
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Entry Deterrent Strategy Reputation of the incumbents
Entry function of the entrant
De novo and entry at time period t
Potential entrant and forces reactionfrom incumbent
Coogans bluff strategy
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Continuing with Unit 4:
Define a price war Determine the Bertrand reaction
function
Signalling Compute a critical Time Line from
observed signals
Find a price point of intersection
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Visit Kaelo v2.0 and
McNutt·s E-book Example: Critical Time Line in a Sony v
Microsoft, Apple v Nokia game dimension Play a PD game and investment game in
Kaelo v2.0 Altruism, fairness, selfish gene, dominant
strategy Understand the link across the extensive
decision-tree to the payoff matrices [nextslide]
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Nash Equilibria Define the Nash equilibria [next
slide]
Analyse the Payoff matrix(B,Y) > (A, X)
Commitment and chat
Strategic ToolBox in terms ofcredible mechanisms
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10,10
8,-50,0
-5,8
Strategy A
Strategy B
Strategy X Strategy Y
Player 1
Player 2
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Prisoners· dilemma Introduce the Prisoners· Dilemma
[next slide]
Low price (compete) v high price(chat) Play mean p64 of e-Storybook and
Table 7.2 of textbook, p236 Punishment strategies
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10,10
13,02,2
0,13
Low P
¡
¢ £ ¤
H¡
¥ h P
¡
¢ £ ¤
Low P
¡
¢ £ ¤
H¡
¥ h P
¡
¢ £ ¤
Player 1
Player 2
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Games as Strategy Segmentation strategy to obtain FMA
Relevance of chain-store paradox
The Umbrella dilemma Value net and PARTS
Strategic ToolBox in terms ofsustainability
GEMS and Tx3 Framework [next slide]
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Industry Analysis
Play-out GameScenario B
e.g. change the
game new
product
development
Strategic Options (Identify the G ames)
Play-out GameScenario A e.g. market
entry competitors
reactions
Play-out GameScenario C
e.g. change the
game
Consolidation
Strategic Decisions
y Porter·s 5 Forces
y BCG
y Value Net
y S.W.O.T.
y P.A.R.T.S.
y McKinsey
y Game theory
OrganizationalGoals
Game theory Insights
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GEMS and Strategic Analysis Knowledge of the
identity of near rival:Action you -> Reactionrival
-> NashReply you
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GEMS and Strategic Analysis Knowledge of likely reaction of near
rival
Binary reaction;Will Player B react?Yes or No?
Non-binary reaction: Player B will
react. Probability = x%
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Final Scenarios«« The Rationale
Markets evolve
The RationaleType, Technology and
Time
The Rationale
Know your market
The Strategy
Non-binary
The StrategyGame metrics and
analytics
The Strategy
GEMS
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Thank you for
participating«««
Sapere aude
¶That which one can know, one
should dare to know·