Table of Contents

Creating An Unbeatable Business-Competitive Strategy in a Nutshell 3

1. Cost leadership 3

2. Differentiation 3

3. Focus 4

Game Theory 4

Basic Rules of Games Theory 4

Simultaneous Games 4

Dominant Strategy 5

Dominated strategy 5

Nash Equilibrium 5

Pareto Optimal 5

Sequential games 6

Game Tree 6
Creating An Unbeatable Business-
Competitive Strategy in a Nutshell
Competitive strategy, in my opinion, is a collection of different strategies and concepts & its usage
in staying competitive or ahead of the market. It involves a lot of research, planning and execution
to gain competitive edge or increased market share.

Before entering into a market, any company must conduct research on the existing players and
the extent of the need for the solution. Also, creating buyer profiles based on who would be the
early adopters, why would they buy, what features are they looking for, what are they comparing it
with etc is important not just during the inception of a company but must be conducted as an
ongoing practice throughout the lifecycle of a firm. Using competitive strategy, the company may
then decide to position itself as an offensive or a defensive player in the market. While doing so it
will most likely use one of the 3 generic competitive strategies as identified by Michael Porter.

1. Cost leadership
Cost leadership is an effective strategy for products that are more commoditised, meaning those
that have no much difference in the market from the others already existing. Example
commodities like groceries.

As a detailed example, let’s take the recent price wars between the big telecom giants in India.
When Reliance Jio entered the market with already established incumbents, it decided to use
Cost leadership as a strategy to gain market share and was successful in this effort. Since there
was no differentiation or focus it wanted to create in comparison to the other existing players like
Airtel and Vodafone, it decided to win the battle by being the cheapest service.

Pitfalls:
• A change in market need might diminish the relevancy of the product and low cost operations
means lack of innovation to stay abreast.

• It’s easy for other players to compete under the same strategy leading to price wars.

• Usually this strategy does not account for future costs that may reduce the company’s profits.

2. Differentiation
When a company is able to create a differentiation from the other players, it has an opportunity to
gain new territories as well as price the product at a higher scale than its competitors. The
differentiation can be in terms anything, such as product design, service, personnel or brand
image. Personally I consider this as the most effective strategy since it allows for some leverage in
building reputation & loyal clientele and also creating an entry barrier.

We can take the example of Starbucks that took one of the most generic commodities like coffee
and differentiated itself from the market by offering high quality coffee & charging above average
prices and most importantly offering an atmosphere or ambience that is hard to copy by the
competitors.

Pitfalls:

• If the differentiating company is priced highly, a competitor may offer something similar for lower
price and the customers might be willing to sacrifice a few features to save costs.

• A competitor may copy the differentiation and the company could lose its uniqueness.

• There may be a reduction in the target market because of its focus only on customers who are
willing to pay for differentiation.

3. Focus
A small company may not want to spend money and effort trying to cover a broad spectrum or
market, in such cases it is ideal to focus all energies into one or two markets and create a niche
first. A market research to figure out the high ROI markets or where the competition is more
vulnerable is the best way to decide on an entry. This strategy can also be used by big companies
to seek advantage in a particular market.

For example: Mac cosmetics started off by targeting only beauty professionals and models and
later expanded itself to a market comprising mainly women who are looking for high quality
products and are willing to pay above average prices. Hence, it does not make sense for a
marketer at Mac to spend the marketing budget in promoting the products to men or to an
audience that is price sensitive.

Pitfalls:

• The sales of the product might be limited due to the size of the market, thus making the future
growth more challenging.

• Being too specific or too focused gives rise to threats from companies with more broadly
incorporated products easily replacing the smaller players.

Game Theory
Since the above mentioned strategies are not being used by a single player and are most
definitely being used by other players too, it gets more interesting and thus, we may also need to
understand a bit about the games that can be played between the players as well.

Basic Rules of Games Theory

1.Identify the players in the market

2.Identify the actions to be performed like marketing, creating a differentiation, penetrating new
market etc

3. Figure out the rules of the game such as whether the players are making strategies based on
what the others are doing or regardless of it.

4. Is it a simultaneous game or a sequential game (In a simultaneous game, each player has only
one move, and all moves are made simultaneously. Example: The rock, scissors, paper game. In a
sequential game, no two players move at the same time, and players may have to move several
times. There are games that are neither simultaneous nor sequential. Example: The game of
poker)

5. It may or may not be a zero sum game (meaning sum of all pay offs is equal to zero). Real world
games are generally never zero sum games.

Let’s first explore the types of games:

Simultaneous Games
Let’s take an instance where Pepsi and Coca cola are both selling soft-drinks. They share the
markets equally and each company has an option to start an ad campaign for $2 million in order
to increase their market share.

Payoffs (hypothetical figures):

So if a player advertises for 2m, they stand to gain market share of 5m.

Suppose the total market size is 10 m.

1. Dominant strategy-each player decides to spend 2m to capture 5m of the market share, thus
we can calculate that their profit after expenses is 5m - 2m = 3m

2. Both don’t advertise-Each get half i.e 5m of the market share (split the market without
spending)

3. Only one advertises-the firm that advertises takes 80% market share. So its profit after
expenses will be 8m-2m= 6m. The other firm is left only with 2% share = 2m

Plotting the above game in a matrix below:

Advertise Do not advertise

Advertise 3m/3m 6m/2m

Do not advertise 2m/6m 5m/5m

This is a two player, non zero sum game.

In a Simultaneous game, both the companies have to decide to either market or not without being
aware of the other’s choices. They can choose one of the below strategies:

Dominant Strategy
Always does better than any other strategy. Hence, a rational player should always choose this
strategy. It means, in the above situation, one is better off choosing to advertise and spending
2m.

Dominated strategy
This never does better than other strategy. A rational player will never choose this. Not to
advertise is a dominated strategy which should not be chosen as any rational opponent will
always choose to advertise and your company will end up losing market share if you choose not
to.

Nash Equilibrium
A dominant strategy equilibrium is always a Nash equilibrium. It is an equilibrium where no player
will benefit from change in the current strategy, assuming the other player does not change their
strategy. Not all games will have a Nash equilibrium. For example; in a goalie and keeper game
where there is never a situation where both can win. Also, there can be games with more than one
Nash equilibrium.

Nash equilibrium in the above Coke and Pepsi example is to choose to advertise. Because both
the companies are better off when they advertise.

But here comes the Nash equilibrium in the form of prisoner’s dilemma. (you can read more about
prisoner’s dilemma here )

Both Coke and Pepsi know that they are better off not having advertised. But they won’t choose
that strategy as they have individual incentive to advertise. So, a prisoners dilemma does not
maximise the player’s profits.

Pareto Optimal
In Pareto optimal there is no other outcome that makes every player almost equally well off and at
least one player strictly better off. Any change in this situation will lead to one of the players in a
 worse condition. Nash equilibrium and Pareto optimal are often misunderstood with each other
and you will need to do a deeper research to get a strong grasp of both concepts.

A Nash equilibrium is not necessarily Pareto optimal, and a Pareto optimal solution is not
necessarily a Nash equilibrium. 

In the above example, both companies deciding not to advertise is Pareto optimal.

Sequential games
In a sequential game, one player moves first and the other players move after receiving the
information from the previous player. For example- Chess.

One can represent a sequential game using a game tree.

Game Tree

Coca cola

High Low

Pepsi
High Low High Low

Payoffs 10 m
1 m
15 m
8 m

Coke
10 m
15 m
1 m
8 m

Pepsi

Taking the same two companies as example let us map a strategic decision of pricing the soft-
drinks in the market. Let’s say Coca cola has two choices, either to price their drinks high or low.
If they price it high and Pepsi follows suit then they both stand to win 10m of market share. But,
suppose Pepsi decides to price their drinks lower, then coke will lose a considerable market
share. If Coke prices it low and Pepsi decided to price it low too, then they both share the market
with 8m each.

Suppose as a firm you want to back track into analysing what decision will be the best for you. All
you require to do is some Backward Induction. If you are strategic advisor for Coke, you can
backtrack using this game tree and figure that a rational competitor, who in this situation is Pepsi,
would unlikely go for a high pricing of product since it will more likely be benefited by placing its
product in low price range.

Activity:

For the above game tree example try to figure out the Dominant, Dominated, Nash equilibrium, &
Pareto optimal situations.

Answer:
Dominant: 8m 8m

Dominated: Deciding to price high is dominated strategy in this case.

Nash equilibrium: 8m 8m

Pareto Optimal: 10m 10m

Reference reading-

Game Theory- http://faculty.econ.ucdavis.edu/faculty/bonanno/PDF/GT_book.pdf

Backward Induction- https://www.investopedia.com/terms/b/backward-induction.asp