Strategy management

Game theory is a mathematical theory in which decision-making situations are modelled in which several participants interact with each other. Among other things, it attempts to derive rational decision-making behaviour in social conflict situations.

A game in the sense of game theory is a decision-making situation with several participants who influence each other with their decisions.

Purely competitive games:
One player's gain is the loss of the other(s); the sum of all payouts is zero (or at least constant).

Zero-sum games

Economic games (even in competitive markets!) are often different - due to growing market volumes

- due to additional value creation through cooperations

Non-zero-sum games

In non-zero-sum games, it is very conceivable that "win-win" strategies exist (several/all players benefit at the same time)!

Game theory analyses the interplay between competition and cooperation in a network of actors.

It models strategic situations in a given business network as a 'game' and helps companies:

• assess their own position in comparison to other network actors,

• anticipate reactions to an actor's actions,

• understand how the other players see the game

• to take advantage of options to change the game to one's own advantage.

A player is your competitor if his participation in the network causes your own participation to be valued lower by the other players in the network than if you were playing alone.

A player is your complementor if his participation in the network results in your own participation being valued more highly by the other players in the network than if you were playing alone.

Play value with your company minus

Play value without your company

• −  Overarching Principle:
  A coopetition-based business model should be designed to maximise shared value creation through the

  use of complementary resources and minimise conflicts over value sharing or appropriation.

• −  Four goals that are not mutually exclusive but can be combined:

1)  Increase the size of the existing market

2)  Development of new markets

3)  Efficient use of resources

4)  Improvement of the competitive position of the company/network

• Platform-mediated business models encompass users whose interactions are subject to network effects (positive or negative), along with intermediaries who provide a platform that facilitates users’ interactions (Eisenmann 2007).

• Platform-mediated business models can encompass one-sided markets (one user group), two-sided markets or multi- sided markets.

 drawing users to one side attracts even more users to that side (e.g. more online X-Box players)  Action: incentives to get new users

registration of a new user has a negative effect on other users (e.g. each new seller has a negative effect because sellers prefer fewer rivals - STUcard and its partner companies)

 Action: consider exclusivity in each transaction category

increasing the number of buyers makes it more attractive to sellers

 Action: search for marquee buyer (80/20 buyers)

 increasing the number of players on one side makes it less attractive for players on the other side (e.g.too many advertising makes a TV programme/channel less attractive for viewers)

 Action: consider restricting the number of players on one side (e.g. through pricing)

Platform-mediated business models have features which differ from traditional business models in product and/or service markets and contradict microeconomic principles:

• Platform operators can market their products/services below costs – if necessary, they can give them away for free.

• A market is often covered by only one (or few) platforms.

• Platform-mediated business models mostly have increasing, not decreasing demand-sided economies of scale.

• “Network effects": the effect, that the benefits for participants in a network increases with the number of participants (increasing marginal returns).

• The platform’s value to any given user largely depends on the number of users on the network’s other side. Value grows as the platform matches demand from both sides.

• At the same time, the platform is unattractive if it has only a limited number of participants. Therefore it is important to avoid the „penguin effect“ (no penguin wants to jump first)

how to solve the chicken and egg problem?

• First mover: make sure you are the first platform!

• Signalling strategy: Signal commitment to the relevant market side(s) (e.g. Sony‘s pricing announcement to launch a new Playstation)

• Subsidise one market side: Typically one side (subsidy) – when attracted in large volume – is highly valued by the other (money) side

• Ensure transaction volume not necessarily number of members by attracting key player (marquee user)

• Offering equity in exchange of platform participation

 Minimum viable market share (low or high); driven by demand for differentiated features and fix cost  Customer captivity
 Value of user data
 Risk of envelopment due to overlapping user bases

1. Consolidating supply and/or demand
2. Creating market transparency
3. Global reach (supply and/or demand side) 
4. Reducing search costs
5. Reducing transaction costs
6. Reducing product development costs

An interconnected system of things or people; "he owned a network of shops"; "retirement meant dropping out of a whole network of people who had.

A communication system consisting of a group of broadcasting stations that all transmit the same programs; "the networks compete to broadcast important sports events"

An open fabric of string or rope or wire woven together at regular intervals A system of intersecting lines or channels; "a railroad network"; "a network of canals"

A business network is a set of two or more connected business relationships in which value is created (adapted from Wikström und Normann 1994; Emerson 1981)

Connected means that one relationship is contingent upon exchange in the other relationship
Primary purpose: to „create value“, i.e. every business network is a value creating system. In business networks,

value is co-created by leveraging

Networks are more complex than bilateral alliances, i.e. a bilateral relationship would typically not qualify as a network.

Networks comprise direct and indirect relationships

Networks relationships can either emerge from markets (semi-internalising transactions, e.g. acquisition of shares) or from hierarchies (semi-externalising activities, e.g. outsourcing)

independent

interdependent

internal units

integrated

-> it is a fact that aircompanies cooperate horizontal so along the value chain 
example one airline A has 15 free seats for a flight to zurich, another has at the same time
2 seats airline B, what makes sense? that airline B sells the seats to airline A

Vertical cooperation: Companies from different positions within the value chain cooperate

Business ecosystems result from configuration processes where an ecosystem leader aligns multiple independent but complementary organizations to offer an integrated solution to meet a specific and often complex customer need

(Stonig and Müller-Stewens 2019).

Same characteristics as business networks – but stronger emphasis on:

 Digital platforms for complementary solution «modules»  Wider, more ambitious value propositions
 Ecosystem leadership
 Relationships across industries and sectors

the simultaneous pursuit of cooperation and competition between firms (Brandenburger & Nalebuff 1996)

Causal rationality begins with a pre-determined goal and a given set of means, and seeks to identify the optimal – fastest, cheapest, most efficient, etc. – alternative to achieve the given goal.

vs.

Effectual reasoning begins with a given set of means and allows goals to emerge contingently over time from the varied imagination and diverse aspirations of the founders and the people they interact with.

Background

• Control and regulation technology

• Explanation for cyclical behaviour in management problems (often caused by delays)

Definition (in the literature on System Dynamics or Systems Thinking)

• Closed chain of cause and effects (Ford)

• Actions create effects in the environment, which in turn have an effect on the original actions (Lane).

Loop polarity

Denotes the effect of an initial change of one variable propagating through a feedback loop. Positive (reinforcing, R) loop: feedback effect reinforces the original change
Negative (balancing, B) loop: feedback effect opposes the original change

--> Rule of thumb: uneven number of negative link polarities --> balancing loop

“Causal diagrams are a powerful tool to map the feedback structure of complex systems. Causal diagrams can be helpful in the early phases of a project; when you need to work with the client team to elicit and capture their mental models...

To be effective, you should follow the rules for causal diagrams, including selection of variable names, layout, and assignment of link and loop polarities. It is best to build up diagrams in steps: resist the urge to create a single, comprehensive diagram.

As in learning to read music, practice is everything. Develop your skills in mapping the feedback structure of systems by sketching causal diagrams to capture the feedbacks you recognize as you read the newspaper or the great works of literature.” (Sterman)

Potentials

• Consistent representation of a complex problem

• Reduction to underlying core dynamics

• Endogenous perspective

• Taking into account (possibly hidden) feedbacks

Limitations

• Net effect of different feedback loops cannot be determined.

• Ambiguous, controversial evidence about specific cause-effect relations can be represented – but not solved

  (otherwise the model would become utterly complicated).

• People may have difficulties to read and understand causal loop diagrams.