that the adversary is trying to do the same to you.” (Dixit and Nalebuff, Thinking Strategically, 1991) • “It is also the art of finding ways to cooperate, even when others are motivated by self interest, not benevolence. It is the art of convincing others, and even yourself, to do what you say. It is the art of interpreting and revealing information. It is the art of putting yourself in others’ shoes so as to predict and influence what they will do.” (Dixit and Nalebuff, The Art of Strategy, 2008)
What is strategy? (3/3) • “A framework for making decisions faced at the highest levels of the organizational or business unit.” − What should your firm, government or non-profit do? Why? − Why you and not some other entity? − How can you effectively manage things you can control (employees, assets, products) in light of things you can’t control (competition)?
Industrial organization and competitive strategy • IO is the microeconomics of firm behavior − pricing, investment, product positioning, etc − How can regulators can efficiently influence firm behavior − Often, but not always, about keeping (accounting) profits low • This class is about how to make “profits” high • Not firm-specific issues − Prices = wages you negotiate for job offers − Investment = getting an MBA − Product positioning = Booth students choose to learn more economics than students at other business schools
The economic way of thinking (1/2) • It was born here at the University of Chicago − Samuelson, Friedman, Stigler, Miller, Coase, Becker, Fogel, Lucas, Scholes, Heckman, Prescott, Myerson, Fama, Hansen… • More econ Nobel prizes than anywhere else, including MIT, Harvard, Princeton and Berkeley • We are going to use more economics in this course than in most other strategy courses at other business schools
The economic way of thinking (2/2) • Economics is a method, not a subject • Three building blocks 1. Individuals exhibit maximizing behavior (weaker condition: they respond to incentives) 2. Markets tend towards equilibrium 3. Preferences and technology are stable • We will apply these unflinchingly and unapologetically
Course layout: price theory and game theory • A price theoretic view of managerial decision-making − Take others’ actions as fixed. What action should you take? • A game theoretic view of managerial decision-making − Others’ payoffs depend on my actions. What set of actions would constitute an “equilibrium” • Can be used on overlapping issues, e.g. product entry − Are these “price” or “game” theoretic-type questions? § Are my salespeople knowledgeable about the segment? § Will my entry in prompt my competitor’s entry into mine? § Can my factories produce the new product cheaply?
Course layout: price theory for managers • Value, Scarcity, Economic Profits and Rents (Week 1) • Porter’s “Five Forces” and Industry Analysis (Week 2) • Competitive Advantage (Week 3) • Complementarities and Sustainability (Week 4) • Vertical Integration and Contracting (Week 5)
Course layout: game theory for managers •
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