Fall, 1997 Prof. Louis Thomas
Office Hours: TBA E52-536
E-mail : Lathomas@mit.edu
253-3781
Course Overview
This is an advanced course in strategic management. This course
will have a particular strong emphasis on competitive strategy
and will apply some basic tools from economics to examine the
strategic decisions that managers make. We will examine those
decisions concerning pricing, capacity investment, advertising,
new product introductions, research and development, and organizational
design. The course will integrate traditional economic models
with case study materials.
Course Materials
Bulk Pack
Class Handouts
Evaluation
Grades will be based on two exams, case analyses, and class participation. The relative
weights of the components are as follows:
First exam 35%
Second exam 35%
Case analysis and 30%
class participation
I. Course Introduction
Session 1 - Introduction
Readings
A New Tool to Help Managers
The Right Game: Use Game theory to Shape Strategy
Understanding Rivalry: Game Theory
II. Competitive Strategy
A. Price Competition
In this section we will examine the strategies incumbent firms can use to maintain their
position in the product market. We will examine the use of price and advertising as
barriers to entry.
Session 2- Entry Barriers A and B
Readings
Case: Entry Barriers (A)- (B) (9-190-101,9-101-102)
Fall For Philip Morris
Questions for the Readings
(A) case
1. As a potential entrant into the industry how do you assess
the possible reaction of the incumbent firm to your entry? Do
you expect to be accommodated?
** Assume that the entrant must show a profit by/in quarter 12**
(B) Case
1. In the absence of a law limiting the use of advertising, how
many firms do you expect to see in the market and how much will
they spend on advertising?
2. Suppose there is currently a sole incumbent firm in the industry?
Should it lobby for the proposed law limiting the use of advertising?
Session 3: Pricing to Deter Entry
Readings
Entry-Deterring Strategies
Dynamic Pricing Rivalry
The Coffee Wars
Can Anyone win the Coffee War?
How to Escape a Price War
Questions for Coffee Industry
1. Evaluate General Food's Strategy to deter P&G in the 1970's.
In light of the models discuss the results of this strategy.
2. There are only two or three major competitors in this industry.
Generally, one would think that few players implies greater profitability.
Why isn't this true for the coffee industry?
Session 4: Fog of Business
Readings:
Case: The Fog of Business (9-793-098)
Questions:
1. Should player E1 enter market 1?
2. In answering 1, above, what assumptions are you making as
to what E1 believes- about the players' rationality, about what
the players believe about one another's rationality, and so on?
Session 5: Signalling Costs
Readings
Case: Signalling Costs (9-793-125)
Reputation and Corporate Strategy: A Review of recent Theory
and Applications
Questions:
1. Might player A want to try to signal its cots position to
player B?
2. Is there a way for it to do so? In answering, pay particular
attention to the question of the credibility of any signal that
A might send B.
Session 6: War of Attrition
Readings:
Hold or Fold? The War of Attrition (9-794-092)
Questions:
1. For how long would you advise player A to fight?
B. Strategies to Lessen Competition
Session 7: Toy Game
Readings:
The Toy Game (9-795-121)
Questions:
1. First suppose that neither Matchbox nor Hot Wheels gives out
rebate coupons. What price or prices do you expect Matchbox and
Hot Wheels cars to fetch?
2. Next suppose that Matchbox, but not Ht Wheels, gives out rebate
coupons. What price or prices do you expect Matchbox and Hot
Wheels cars to fetch now?
3. Next suppose that both Matchbox and Hot Wheels give out rebate
coupons. What price or prices do you expect Matchbox and Hot
Wheels to fetch now?
Session 8: Contracts with customers
Readings:
Practices that Credibly Facilitate Oligopoly Coordination
American Airlines Value Pricing (A) and (B) (9-594-001, 9-594-019)
Questions:
1. Evaluate American Airlines value pricing scheme? Under what
conditions will it work?
Session 9: Promotional Pricing
Readings:
Mixed Strategies
II. Industry Analysis
A. Commitment and Competitive Strategy
Session 10- Taxonomy of Business Strategies
Readings
Commitment: How Narrowing Options Can Improve Competitive Positions
Session 11- Commitment and Competitive Strategy
Readings
Case: Nucor at a Crossroads (9-793-039)
Questions:
B. Sunk Costs and Market Structure
Session 12- Sunk Costs and Market Structure: Five Forces Reconsidered
Readings
Sunk Costs and Market Structure
Advertising Sunk Costs and Credible Spatial Preemption
Session 13: Advertising Sunk Costs
Readings:
Case: Gillette launch of sensor (9-792-028)
Questions
Session 14: Advertising Sunk Costs Continued
Readings:
Case: Coors (9-388-014)
Questions
Session 15: In Class Midterm Examination
III. Technology Competition
A. Imitation
Session 16- Innovation and quick
imitation
Readings
Case: Minnetonka (N9-795-163)
Innovation and Imitation (9-187-160)
Questions
1. What was Minnetonka's strategy
prior to the launch of Softsoap?
2. Compare Minnetonka's experiences
in the soap and toothpaste business. How do you explain the differences?
Questions for Innovation and Imitation
1. You are the strategic manager
at firm A. You decide to spend $C on new product advertising.
You realize that managers at firm B will probably copy your product
and follow you into the market. You believe that managers at
B will also spend $c on advertising. For various levels of advertising
dollars, predict the response of B's managers. Given these beliefs,
what should you do?
2. Suppose that marketing research
has predicted that $9.5 million must be spent on new product advertising.
What strategic choice would you make?
3. The probability of success has
now increased to 90%. Would this change in beliefs affect your
optimal strategy given in question 2?
B. Patent Races
Session 17-Races for New Technology
Readings
An R&D Race (9-190-108)
The Incentive to Innovate
Tinkers versus dreamers
Pentium pretenders
Questions for R&D Race
Firm A is a monopolist in an industry currently earning flow profits of $5 per period.
Entry into the industry is difficult because A holds a patent on the existing technology.
However, the possibility of an alternative new technology has become apparent. If
successful, the new technology will supersede and completely replace the old one. A
monopolist operating with the new
technology would earn flow profits of $10 per period.
Suppose that firm B is a potential entrant and that A and B are engaged in a race to
develop the new process. Whichever firm succeeds in getting the patent will acquire the
status of a monopolist.
Suppose that the R&D technology
is the same as in a single stage of "An R&D race"
5. Do you expect the incumbent firm
to survive? Why?
6. First, consider an industry where
there is no threat of entry. What are the incentives to engage
in R&D of a monopolist in this industry? Now suppose the
industry consists of a duopoly. How do the incentives of the
two duopolists compare with those of a monopolist?
7. Next, suppose that the industry
faces the threat of entry. How do the incentives to innovate
facing (a) an incumbent monopolist and (b) a potential entrant,
compare?
Is rapid innovation necessarily
associated with rapid changes in incumbency?
C. New Product Competition
Session 18: Power Play
Readings:
Power Play (B): Sega in 16-bit Video Games (9-795-103)
Power Play (C ): 3DO in 32-bit Video Games (9-795-104)
Sega Leaps Ahead by Shipping New Player Early
3. Evaluate Trip Hawkins' strategy for changing the video-game
game.
IV. Corporate Strategy
A. Diversification and Market Entry
Session 19- Entry Choices
Readings
Case: Judo and the art of entry (9-794-103)
Questions
1. Suppose that: (a) each buyer has a willingness-to-pay of
$200 for one unit of either the incumbent's or the entrant's product;
and (b) both incumbent and entrant have a $100 unit cost of serving
buyers. Formulate a strategy for the entrant. How much money
can the entrant make?
2. Now suppose that: (a) each buyer has a willingness-to-pay
of $200 for one unit of the incumbent's product and $160 for one
unit of the entrant's product, and (b) the incumbent has a $100
unit cost and the entrant a $120 unit cots. Formulate a strategy
for the entrant. How much money can the entrant make?
3. Finally, suppose that: (a) each buyer has a willingness-to-pay
of $200 for one unit of either the incumbent's or the entrant's
product; and (b) the incumbent has a $120 unit cost and the entrant
an $80 unit cost. Formulate a strategy for the entrant. How
much money can the entrant make this time?
4. How much value does the entrant add in each of the games described
in 1,2,and 3 above? How does the amount of value that the entrant
adds in each game compare with the amount of money it can make
in the game? Explain the differences (if any) between the two
quantities.
Session 20: Multimarket Contact
Readings
Multimarket contact and long term competition (9-190-144)
Multiple Point Competition
Questions:
1. Your consulting firm is asked to analyze the markets by one
of the players. One suggestion to increase performance would
be for the four firms to merge into two separate conglomerates,
each of which operated in both markets. Comment on this strategy;
specifically if and formed conglomerate
A, and and formed conglomerate B.
2. Suppose an additional firm (C)
operates in one of the markets. Hence, market I has three firms
(A,B,C) and market II has two firms (A,B). Even if costs are
zero, firm C would seemingly have an advantage over A and B since
if the firms charge the same price, C's market share would be
50% and A and B would split the rest. Now, what are the implications
of firms and forming a single firm? What are the implications
for the two B firms forming into a single firm?
3. Suppose the markets have four
firms (2 firms in A and 2 in B). However, the individual firms
have different cost functions. Specifically, the unit costs of
product are:
So, firm A has a cost advantage
over firm B in market 1, and B has a cost advantage over A in
market 2. How would these differences in cost structures affect
the optimality of the merger strategy considered above?
Session 21: Diversification through new product entry
Readings
Case: Competition and Product variety (9-190-100)
Economics of product variety (9-191-099)
NBC Takes Aim at Tuesday Nights
Questions
1. Which product types will managers at firms A and B decide
to manufacture? State the logic underlying your beliefs?
2. Assume that firm A enters the market first. If A's managers
wish to deter entry by B, which products should they produce and
why?
3. Assume A has a monopoly position. What products should A's
managers produce and why? Do A's managers want to serve the
entire market?
4. Suppose the marginal "psychic costs" of consumers
increase. Will this affect the choice of products that the firms
produce and why? Will the resulting profits remain the same,
or will they change?
hint: Remember that the model is symmetric since demand is uniform. That is the prices
and profits are the same if one product is at 0 and the other at 1 as if one product were at
4 and the other at 3.
Session 22: Credible Spatial Preemption
Readings
Case: The Ready-to-Eat Cereal Industry in 1994 (9-795-191,9-796-122)
Product proliferation and preemption (9-190-117)
Effects of Diversification on Entry and Exit Decisions
Questions
1. Why has RTE cereals been such a profitable business? What
changes have led to the current industry "crisis?
2. Why have private labels been able to enter this industry successfully?
How do the cost structures of private label and branded cereal
manufacturers differ?
3. What does General Mills hope to accomplish with its April 1994 reduction in trade promotions and prices?
4. What are the risks associated with these actions? How do
you expect General Mills' competitors to respond?
5. What should General Mills do?
Questions for Product proliferation and preemption
1. Suppose firm A is a monopolist and anticipates no near-future
entry. If you were the strategic manager at A, how many products
would you introduce (and why?), and how would you position the
products?
2. Assume you are the strategic planner at firm B, a potential
market entrant. Given your choice of strategic action (for A),
would you enter the market, and if yes, how would you position
your product?
Session 23 - Capacity Preemption
Readings
Case: Du Pont's Titanium Dioxide Business (A) (9-390-112)
Questions
1. What are the major cost drivers in this industry and what
is their impact on Du Pont's Competitive position?
2. Should Du Pont pre-empt?
Session 24 - Capacity Preemption
Du Pont's Titanium Dioxide Business continued
B. Strategies in Declining Industries
Session 25- Exit
Readings
Case: The Ethyl Corporation in 1979
(9-388-075)
C. Vertical Contracting
Session 26- Vertical Contracting
Readings
Vertical Restrictions
Federal Investigation of Appliance Makers Involves Advertising
US Investigating No-Haggle Car Pricing
Is General Nutrition Headed for Civil War?
Big Three's Methods of Selling Vehicles
to Rental Firms Being Probed by US