CHAPTER 10 PERSPECTIVES OF STRATEGY

Learning Outcomes

Particularly at the end of this chapter, the students should be able to:

1. understand the strategy perspective model;

2. trace the history of strategy from a military perspective;

3. analyze game theory as a strategy concept;

4. differentiate games with sequential moves from games with simultaneous moves;

5. apply game strategies in an organization;

6. analyze the economics perspective of strategy; and

7. demonstrate the concept of the learning curve in an organization

Competitive formulation and smart implementation of strategies for many corporate

organizations and businesses can bring about that much sought-after growth and success. As discussed
earlier, strategy is multi-dimensional: a concept or mindset, an approach or process, or people. For
some organizations, people are their most effective strategy because these individuals effectually
motivate and "pull" their workforce to near optimal levels of productivity and creativity. These distinct
nuances illustrate the versatility, richness, and intensity of strategy as shown in its multi-sided facets. Let
us now look at strategy from another set of perspectives. Some managers say that doing business is like
waging a war. Others say it is playing a game, and winning and losing are the only two options. This
analogy has been a proverbial comparison for the last decades. In this chapter, we will go over the
popular and much-discussed military, game, and economics strategies. It is our hope that from these
stratagems, we can get valuable insights into the nature of modern-day business practices and
management.

Figure 10.1 Strategy Perspective Model

 Military Perspective of Strategy

Boardrooms are like battlefields. Doing business or running an organization is like fighting a war
where strategies are the guns and ammunitions used during any engagement Can we say that
management and "militarization" are the same, or are there salient similarities and differences that
provide for useful comparison?

To date, there are two popular books written on warfare. These are Sun Tzu's, The Art of War and
Miyamoto Musashi's The Book of Five Rings; one being Chinese in origin and the other, Japanese. The
beginnings of strategy date back four to five thousand years before Christ. During the early stages of
ancient civilization, tribal clans were characteristically unstable. Wars were common: one tribe trying to
conquer and subdue the other or groups of clans joining forces to fight a common foe. In these neolithic
village conflicts in China, men were compelled to go to battles and win their small wars. Later on, these
wars became bigger that men had to develop their ingenuity to combat. Subsequently, they invented
and perfected weapons to make sure that they could harm, if not kill the enemy, and in addition, plan
both offensive and defensive tactics and operations.

People trained to win. Winning became the sole goal of engaging in war. Once they won a battle, the
conquerors distributed the spoils to the victorious forces. The chieftains imposed their power and ruled
over the people they subjugated. Dynasties were established. This entire gamut of going into combat
and waging wars became too frequent that commanding generals had to make sure that their successful
formulae for winning were intact and not forgotten. This started the writing of battlefield lessons and
combat experiences, spelling the beginnings of the science of military tactics.

1. The Art of War. This book is the oldest military classic in Chinese literature. Written around 400 to
320 BC, the exact origin of this book has not been established, neither has its authorship been
identified. According to scholars of military science, The Art of War is included in the Seven Military
Classics. Since then, the book underwent translations into different original versions. In all these
translations, judicious scholarship was applied to ensure that the true essence of the writings is not
deviated or unjustly modified. Historical writings show that Sun Tzu was the commander-in-chief of
Ho Lu, the King of Wu of China in 500 BC. As a general, he waged and won many battles. To
document how successfully he won these victories, his tactics and military advice were compiled for
posterity. Sun Tzu's The Art of War is the first book that formalized strategy. Some pieces of advice
to military leaders are the following:

Table 10.1 Sun Tzu in Present-day Strategy

Sun Tzu's Writings Present-day Strategy

On Planning: "War is a matter of vital importance
to the State. It concerns the lives and deaths of
people and affects the survival or demise of the
State. It needs to be thoroughly studied. With
careful and detailed planning, one can win; with
careless and less detailed planning, one cannot
win. How much more certain is defeat if one does
not plan at all! From the way planning is done
beforehand, one can predict victory or defeat."
On the Business Environment: "Know your
enemy, know yourself, and your victory will not
be threatened. Know the terrain, know the
weather, and your victory will be complete.”
Doing business is an activity that necessitates
planning. Considering the capitalization infused in
any organizational venture, careful preparations
have to be done. There should be no room for
mediocrity and haphazard groundwork. Thorough
and precise study and planning can make a
business successful. If disregarded or planned
sloppily, success will be difficult to attain, if at all.
In any business venture, organizations should
competently know both the external (business,
national, and global) and internal (knowledge of
people, products, services, facilities, and
 management) environments. Knowledge of the
business milieu prepares a company to compete
and take the right strategies.
On Measurement: "Terrain gives birth to The need for accuracy in measurement of
measurement; measurement produces the performance is essential, such as precision in
estimation of forces. Estimation of forces gives productivity, sales figures, business expenses,
rise to calculating the number of men. Calculating and investments in technology, facilities, and
the number of men gives rise to weighing others. Unless a company knows its resources, it
strength. Weighing strength gives birth to will find difficulty making its moves toward
victory." achieving its set goals and objectives.
On Competence: "Generals should possess the Officers and managers should possess qualities
following strengths: wisdom, knowledge, that epitomize expertise, leadership, strong
credibility, strictness, benevolence, courage, character, management skills, good values, and
skillful, unconcerned by fame, unconcerned by ethical standards. This confluence of traits
punishment, places army first, tranquil, obscure, propels organizations to attaining success.
upright, self-disciplined, clever with all-
encompassing talents."
Other Lessons from Sun Tzu
“Compare the enemy's army with yours to know Continuously change your strategies. They should
your own strengths and weaknesses." not be predictable.
“Whoever is the first in the field will be fresh to All men can see the tactics whereby one
wait the enemy. The second will hasten and conquers, but none can see the strategy out of
arrive exhausted." which victory evolved.
“When the common soldiers are too strong and You can be sure of victory if you attack places
their officers are too weak, the result is that are not defended.
insubordination. When the common soldiers are
too weak and their officers are too strong, the
result is collapse."

The Art of War is necessary reading for any successful corporate individual. He should
have read or at the very least, should be familiar with this book. Filled with comparisons and
implications to any organization, its practical applications are gleaned as one reads through the
pages.

2. The Book of Five Rings. The author, Musashi Miyamoto, was born in 1584. His lifetime
witnessed Japan's history where feudal lords called "daimyos" were fighting each other for land
and power under weak emperors. Before Musashi's birth in 1573, Oda Nobunaga rose to power
to become Shogun in Japan. A military dictator, he crushed all rebellions and tried to unify
Japan. Hideyoshi, who revived the power of the samurai, succeeded him. The samurai were
privileged to wear two swords: the long sword and the short one for everyone. Commoners
were not allowed to wear the long sword. Thereafter, Tokugawa leyasu succeeded Hideyoshi
and became Shogun of Japan.

Musashi Miyamoto was a samurai. The samurai demanded the highest esteem in Japan.
They were an elite that included rich young men, government officials, warriors, lords, and
soldiers. They fought and won wars. However, when provincial armies were not necessary, they
 were disbanded leaving Musashi and the other samurai with nothing to do. Some of these
samurai became artisans while others went back to their lands and castles. Nonetheless,
Musashi continued to pursue his ideal of a warrior. He searched for enlightenment and perfect
understanding following the path of Kendo, the Way of the Sword. The Way of the Sword is tine
moral teaching of the samurai, a combination of Zen, Confucian philosophy, and the Shinto
religion.

The Book of Five Rings discusses the Way of Strategy. Musashi says that there are four
ways by which men pass through life. They are as (1) gentlemen and samurai, (2) farmers, (3)
artisans or carpenters, and (4) merchants. The gentlemen belonged to the highest category and
included officials and wealthy people. The farmers were next because they provided the rice
crops followed by the artisans or carpenters. The last group was the merchants who later rose
to prominence because of the wealth they accumulated.

Table 10.2 Musashi Miyamoto in Present-day Strategy

Musashi Miyamoto’s Four Ways Present-day Strategy

The Way of the Gentleman Warrior: "The way of An executive/businessman has to learn how to
the warrior is to master the virtue of his appreciate the worth of his expertise,
weapons. If a gentleman dislikes strategy, he will capabilities, and skills. He has to value the
not appreciate the benefits of weaponry." resources at his disposal: people, capital,
technology, facilities, equipment, and other
assets. This is valuing.
The Way of the Farmer: "Using agricultural With valuable and adequate information on
instruments, he sees springs through autumns developments, an executive/businessman can
with an eye on the changes of the season." manage an organization successfully by being
attuned to the changes in the milieu. This is
observing.
The Way of the Carpenter: "The way of the Organizations have to be adept in the use of
artisan is to become proficient in the use of his business tools, models, and resources, such that
tools; first to lay his plans with a true measure, plans are accurate and achievable. Then can goals
and then to perform his work according to plan." be concretized and achieved. This is doing.
The Way of the Merchant: "The winemaker Every executive/businessman should optimize his
obtains his ingredients and puts them to use to human potentials and resources. His goal is to
make his living. The way of the merchant is make profit, create opportunities for growth, and
always to live by making profits." gain every advantage or benefit available. This is
creating.
These four ways, referred to as the Way of Strategy, summarize the essentials of doing business.
Corporate executives, businessmen, and ordinary people should be able to value human, financial,
and technological resources; observe the business, corporate, organizational, local, and global
environments; possess the necessary skills and expertise to actualize the plans they have laid, and
consequently, create profits.

The Way of Strategy of Musashi is shown as five books called The Book of Five Rings or Go Rin
No Sho. Go Rin refers to the five Parts of the human body, namely, the head, left and right elbows, and
left and right knees. The five books are Ground, Water, Fire, Wind, and Void.
 a. The Ground Book is the roadmap to strategy. It shows the Way of Strategy.

b. The Water Book explains the methods in attaining victory in strategy.

c. The Fire Book shows how to fight to attain victory.

d. The Wind Book explains the other ways in strategy.

e. The Void Book explains the true spirit of strategy. It is the penultimate book.

Each of these five books discusses strategy in different ways.

Table 10.3 Musashi Miyamoto's Ground Book in Present-day Strategy

“It is difficult to realize the true way. Know the
smallest things and the biggest things, the
shallowest things and the deepest things."
The real essence of present-day strategies is to
know everything about one's career and
preoccupation. An individual/organization is
expected to have competencies, skills, expertise,
and experience in different extents, depths, and
dimensions. Knowledge has to be encompassing,
subtle, and significant. One cannot consider
seemingly negligible things as unimportant.
Trivial facts and realities can be most meaningful,
at times. Critical and inconsequential things
constitute the totality of strategy. If not, strategy
becomes lukewarm, incomplete, and not
optimized. In that sense, strategy will fail to
produce a winner.

In short, business strategies vary in types and concerns. Some strategies are influenced and
determined by functionality; others are profit-oriented in nature, while others are focused on
community benefits. While some successful strategies are spontaneous, there are standard, tested, and
proven approaches. Hence, they should be a combination of both novel and traditional techniques.
More importantly, strategies need to be adopted by the right people in the right environment and
during the right time. How does one get to know who, where, and when to implement the best
strategies?

Table 10.4 Musashi Miyamoto's Water Book in Present-day Strategy

"In strategy, your spiritual bearing must not be
any different from normal. One should be
determined but calm in fighting and in everyday
life. Meet the situation without tenseness yet not
recklessly, your spirit settled yet unbiased. Even
when your spirit is calm, do not let your body
relax, and when your body is relaxed, do not let
your body slacken. Be neither under spirited nor
Strategy is an art. In business, one should project
an appearance of normalcy, of customary
calmness, and control of emotions. His way of
looking and dealing with things may be both a
little tense to motivate him to action and a little
relaxed to calm him down. In a continuum of
mobility, one's "spirited" bearing should not go to
the far end but should be balance. Most
 over spirited. They are both weak. Do not let the
enemy see your spirit."
importantly, one should develop the ability not to
show one's reaction when doing business. Never
give away oneself by allowing competitors or
giving them the opportunity to read one's mind:
that is, one's strategies. The spirit is always a
strategy weapon.

In short, the essence of strategy is the spirit of the business strategist. The spirit of a successful
strategist is like water that flows naturally and without difficulty. He adapts to the shape of the strategy,
sometimes, simple and at other times, complex. Like water, the spirit of a strategist is confident, clear,
energetic, fearless, and decisive.

Table 10.5 Musashi Miyamoto's Fire Book in Present-day Strategy

"Examine the environment." Strategizing involves scanning the business

environment. It entails an awareness of what is
happening and knowing the latest developments
prevailing internally and externally. It is carefully
studying the variables that are significant to one's
company. It is planning strategically and aligning
it to existing realities. It is pursuing strategies for
survival and competitiveness. It is adapting to the
present paradigm of change.

Strategizing is a complex business and organizational activity. It requires business intelligence in

terms of having a complete big picture of the industry, knowing the idiosyncrasies of the situation,
adopting suitable strategies to stay afloat, at the least, and using these strategies correctly and to one's
benefits and organizational progress. It needs ongoing training to ensure readiness to make quick
decisions. Continuing training is necessary in strategizing. There is no room for complacency.
Preparedness and competence are the rules of the game in business.

Table 10.6 Musashi Miyamoto's Wind Book in Present-day Strategy

"In a combat, do not fix your eyes on the details
and neglect the important things. Your spirit will
become bewildered and victory will escape you."
There is a tendency for strategies to be
complicated, redundant, and wordy. They end up
confusing or deviating from what it should
address. Hence, strategists should not be stuck in
insignificant and irrelevant details, such that the
essentials are overlooked and not appreciated.
Eventually, organizational success is inadvertently
missed out.
 An accomplished and successful strategist should not use only one strategy in running an
organization, a company, a small business unit, or a department. He has to know other cutting-edge
strategies.

These differentiated and forward-looking strategies come in different forms. Ahead of its time,
they should be simple enough to be readily understood, markedly versatile to be easily adapted, wide-
ranging to be useful and effective, and innovative to create that needed impact on all customers.

Table 10.7 Musashi Miyamoto's Void Book in Present-day Strategy

“To attain the way of strategy as a warrior, you
must study fully other martial arts and not
deviate even a little from the way of the warrior.
With the spirit settled, accumulate practice day
by day and hour by hour. Polish the twofold spirit
heart and mind, and sharpen perception and
gaze. When your spirit is not the least crowded,
there is the true void.”
The true strategist is someone who possesses a
full comprehension of what strategy is all about.
Knowledgeable of other strategies, he is sharp
with expertise and knows the environment. He
has first-hand data and information and is
likewise aware of current and fundamental facts
and peripherals. He is both macro and micro in
perspective. He sees things objectively and
spiritually. His strategy viewpoint is consistent
with the true nature of man, bereft of deviant
behavior. In other words, he strategizes morally
and ethically. In him, there is no evil but virtue.
This is the real essence of a strategist.

In summary, the greatest strategists are generals or individuals engaged in warfare. When
physical life is greatly at stake, preservation is the greatest motivator of winning. As a result, the
significance of winning drives these people to exhaust all means to win their enemy and succeed.

Questions 10.1

1. Explain what the author meant by the military perspective of strategy by giving your own examples.

2. What is the importance of Sun Tzu's strategies in modern-day living? Which of these strategies
impressed you the most and why?

3. Are Miyamoto strategies relevant today? Explain your answer.

4. As a student, give five examples where you can apply Musashi's strategies as enumerated in his
Ground, Water, Fire, Wind, and Void books.

5. Who is the better strategist: Sun Tzu or Musashi Miyamoto? Explain your answer.

 Game Perspective of Strategy

 Aside from viewing strategy from a military perspective, it can likewise be viewed from the
standpoint of playing games) This outlook is based on a mathematical model called game theory. In the
early twentieth century, mathematicians began to study simple games, which graduated to more
complex games like chess. Thus, we had the beginnings of the so-called game theory. It was John von
Neumann, a mathematician, who extended this theory to include poker. Game theory even gained
prominence with the winning of John Nash as the 1994 Nobel Memorial Prize in Economics.

 Game Concepts and Techniques

Game theorists consider and treat all situations of strategy choices as strategies for games. Game
theory is essentially linked to neoclassical economics. Their commonality is the concept of rationality.
The assumption of economics is that human beings are rational when making economic choices. In
short, a person makes a decision in the light of aiming to maximize his rewards.

Rewards may be in the form of income and returns. Thus, strategy from the game theorist’s
perspective considers a person's best response to the strategies chosen by others and this is in terms of
maximum payoff. Furthermore, game theory carries certain assumptions. It assumes rationality that is
full knowledge in calculating and pursuing the strategy, common knowledge of rules of the game, and a
framework of equilibrium or using the strategy that best responds to the strategies of the other players.

Players have strategies. A game Outcomes with different payoffs are

strategy is a plan of action. expressed as expectations if outcomes
are random or involve some risks.

Figure 10.2 Game Strategy

Strategic games are situations characterized by interactions among players and are classifies
according to the timing of the play, common or conflicting interests of players, number of interactions,
amount of information available, type of rules, and feasibility of coordinated action.

Game strategies are calculated and purposive and may be based on complete information,
incomplete information, or no information at all. They have the following characteristics:

1. considers the environment

2. involves intuitive skills

3. contains the element of reciprocal fear of surprise attack

4. continuous and not absolute

The implementation of game strategies does not assume expertise. It is a skill, and it can be learned
by experience; it is dynamic and evolving. Payoffs can be intangible. Even with definite payoffs, errors
are inevitable. As a whole, game strategies give a framework for reality check. Games may be classified
into those which are played with the following moves: sequential, simultaneous and strategic.

1. Games with Sequential Moves. Sequential moves are steps taken chronologically where an
action is a consequence of a previous move. For example (illustrated in Figure 10.3),
Congressman Rodriguez currently occupies a congressional seat. In the next three years, a
candidate, Mr. Zulueta is a potential challenger. In this race, Rodriguez must decide whether to
launch a defensive advertising campaign to ensure his congressional seat or not. If one is to
depict this decision-making, there will be different outcomes vis-à-vis different combinations of
moves by both Rodriguez and Zulueta. There will be four possible combinations of moves:

Figure 10.3 Game with Sequential Moves

a. Rodriguez will advertise; Zulueta will enter the race.

b. Rodriguez will advertise; Zulueta will not enter the race.

c. Rodriguez will not advertise; Zulueta will enter the race.

d. Rodriguez will not advertise; Zulueta will not enter the race.

Referring to Figure 10.3, the following payoffs have been enumerated based on the perspectives
of each individual. Rodriguez's point of view includes:

a. If Rodriguez advertises and Zulueta enters the race, his payoff is one. In short, he spends with
Zulueta challenging him. This is the worst payoff for him. If on the other hand, Zulueta does not
enter the race; his payoff is three because he runs with no one contesting him, thereby
increasing his reputation.

b. If Rodriguez does not advertise and Zulueta enters the race, his payoff is two. Here, he has a
challenger even if he does not spend on advertisement. Lastly, his best payoff is four when he
does not advertise and Zulueta does not enter the race.

The following are Zulueta's payoffs:

 a. If Rodriguez advertises and Zulueta enters the race, Zulueta's payoff is one. This is his worst
payoff because he may most likely be defeated and this will irreversibly harm his standing with
the public. If Zulueta does not enter the race, his payoff is three since he can say that
Rodriguez's advertisement made his campaign doomed to failure.

b. If Rodriguez does not advertise and Zulueta enters the race, Zulueta's payoff is four which is
his best payoff If Rodriguez does not advertise and Zulueta does not enter the race, then his
payoff is two since Zulueta's people may regard him as someone who was not serious and may
not support him in the future.

Sequential games are usually illustrated using tree diagrams referred to as the extensive form of
a game. They consist of nodes and branches. In Figure 10.3, the first node, Rodriguez, is the decision
node or more particularly, the initial node. The nodes containing the respective payoffs are called
terminal nodes. The lines are the branches. In the payoff, the first number written is that of the
individual who makes the first move. In this example, it is Rodriguez. This game of strategy includes the
following:

a. The players (i.e., Rodriguez and Zulueta)

b. The information they possess about the play of the game

c. Their actions

d. Their payoffs and possible outcomes of the game

Each of them has complete information of what he can do and what his opponent does or can
do. Each player has two possible actions at each node and four terminal payoffs. In sequential games,
the order of action is given. The action of one individual is dependent on the first move. In some
instances, the first mover has an advantage. In other instances, the second mover has the advantage.
Note that there can be more players in sequential games. The tree then becomes more complex.

2. Games with Simultaneous Moves. These are taken concurrently under conditions of incomplete
or imperfect information. Here, the players must move without knowledge of what their co-
players have decided to do. Examples of this type of gaming consist of zero-sum games,
dominant strategies, and Nash equilibrium. Games with simultaneous moves use a payoff table.

A zero-sum game is a game where any benefit gained by one is lost to another. ln this game, the
sum of the payoffs is always zero where one player loses whatever the other players win. An example is
shown -in Table 10.8. The rock-paper-scissors game is a common children's game. Two children, Maxine
and Maureen are playing this game. The rules for winning and losing are as follows: scissors cut paper,
rock breaks scissors, and paper covers rock. The payoff table shows that whenever Maureen wins,
Maxine loses, and whenever Maureen ties, Maxine must tie.

Table 10.8 Zero-Sum Payoff

 Dominant strategies give the highest payoff:

a. If one strategy yields a higher payoff than a second strategy regardless of which strategies the
other players choose, the first strategy is said to dominate the second.

b. If one strategy dominates all other strategies for a particular player in the game, it is said to
be a dominant strategy for that player and the second strategy is the dominated strategy.

Another example is the dumping game, as shown in Figure 10.4. Supposing Lizza and Rose are
two property owners. Both own vacation houses in Tagaytay. Their properties aresituated side by side.
Unfortunately, there are no garbage collectors. They can either contract collection and pay P1,200.00 a
year or choose to dump the garbage in each other’s property.

Figure 10.4 Dumping Game

Both vacation house owners will make their decisions at the same time. They will choose two
strategies: pay a garbage collector or simply dump the garbage on the neighbor's property. What are the
payoffs in this game? Although the benefits are subjective, they can be expressed in monetary values.

Both Rose and Lizza personally value their rest and relaxation at P400,000.00 per year with
garbage collection, and P300,000.00 per year if there is dumping. In other words, if there were no
dumping, neither Lizza nor Rose would give up a year of occupancy for less rent than P400,000.00; but if
there is dumping on the property, each of them would give up the year of occupancy or P300,000.00. To
illustrate the dumping game:

Table 10.9 Dumping Game Payoff

 Referring to the table, each player chooses her best response to the strategy the other player
has chosen or can be expected to choose. Take note on Table 10.9 that the first number and second
number is Rose and Lizza, respectively. In both cases, dump is always the best response. The strategy
dump is an example of a dominant strategy while garbage collection is the dominated strategy. When
each player in a game chooses his dominant strategy, the result is a dominant strategy equilibrium.

Table 10.10 Dominant Strategies in Dumping Game

Mathematically, the dominant strategy equilibrium is the solution to the game. However, in the
dumping game example, it is more of the problem itself. In this case, this example is considered a social
dilemma. A social dilemma is a game with dominant strategy equilibrium where the dominant strategy
solution is different from the cooperative solution to the game.

Going back to the dumping game example, if both Rose and Lizza agree on the strategy garbage
collection, then the outcome is a cooperative solution. The cooperative solution of a game is the list of
strategies and payoffs that the players would choose if they could commit themselves to a coordinated
joint strategy like agreeing to have the garbage collected. If there is no possibility to commit themselves
to a coordinated joint strategy so that each assumes the other will choose a best response strategy' the
outcome is called a non-cooperative solution. Lastly, Nash equilibrium is the equilibrium of a non-
cooperative game where each player’s strategy is best for him, given that each player is satisfied with
the strategy of his choice.

An illustration of Nash equilibrium is the textbook writing game. Gener and De Jesus are authors
of rival textbooks in strategic management. Both their books are of quality and they both know that the
marketability of their books will be dependent on their respective book’s number of pages. To capture a
wider readership audience, each author can choose among three strategies: write a book of 200 pages,
250 pages, or 300 pages.
 Table 10.11 Textbook Writing Game payoff

Referring to the table, each player chooses his best response to the strategy the other player
has chosen or can be expected to choose. Take note on Table 10.11 that the first number and second
number is Gener and De Jesus, respectively.

Table 10.12 Strategies in the Textbook Writing Game

In this example, if Gener chooses to write 200 pages, De Jesus will respond by writing 250 pages;
if Gener chooses to write 250 or 300 pages, De Jesus will respond by writing 300 pages. Considering that
Gener's idea is to choose to write a number of pages longer than De Jesus, there is no one strategy that
is his best response to each of the different strategies De Jesus might choose. Since the game is
symmetrical as shown in Table 10.12, there is likewise no dominant strategy for De Jesus either. Hence,
the textbook writing game has no dominant strategy.

The textbook writing game is an example where there is no dominant strategy but has a Nash
equilibrium. If there are two strategies such that each strategy is a best response to the other strategy,
then the strategies are called Nash equilibrium strategies. If Nash equilibrium strategies exist in a game
and the players choose those strategies, then a Nash equilibrium in the game results. In the textbook
writing game, the list of strategies is (300, 300) for both Gener and De Jesus. Since 300 is the best
response to 300 from the perspective of both players, this list of strategies is a Nash equilibrium.

3. Games with Strategic Moves. These are devices applied to work to one’s advantage. To adopt
this mode, the action should be observable and irreversible. There are three types of strategic
moves, namely, commitment, threats, and promises. Threats can be a deterrent while promise
can bring about compliance. To acquire and enhance credibility in strategic moves, the following
can be implemented:
 a. Reducing freedom of action by automatic fulfillment and delegation

b. Burning bridges and cutting off communication

c. Changing payoffs

d. Dividing the game into small steps

e. Espousing teamwork

f. Rationalizing irrationality

Applications to specific strategic situations include brinkmanship, voting, bidding, auction,

bargaining, markets, competition, policy setting, and labor arbitration.

4. Styles in Game Strategies. There are certain styles in undertaking game strategies. They include
use of surprise, rational irrationality, collection of information, a deliberate study of previous
moves undertaken, an earnest move to go back to the root problem, effort to monitor moves,
collaborative action, sometimes not doing anything, and abandonment.

In essence, the game perspective of strategy focuses on winning and achieving a reward.
Basically, information is a critical component in winning a game. Game moves can follow one
another, be at the same time, or simply smart. While payoffs can be intangible, dominant
strategies give the highest payoff. Thus, the applications of game strategies necessitate a
consideration of the environment, the use of intuitive skills, and the use of the element of
surprise.

Questions 10.2

1. Differentiate game strategies from complete information, incomplete information, or no information

at all. Give examples for each.

2. Classify and define games that are sequential, simultaneous, and strategic.

3. Differentiate dominant from dominated strategy. Give examples for each.

4. Define Nash equilibrium and give an example.

 Economics Perspective of Strategy

In addition to looking at strategy a military and game perspective, strategy from the angle of
economics must be analyzed. Although different strategic situations continually evolve due to inevitable
variables of growth and change, there are durable principles that are applicable to these emerging
scenarios. Such theories can guide strategists in understanding better how firms compete thereby
providing them bases when making strategic decisions.

For a start, let us try to demonstrate the applicability of these principles at three points in time,
namely, 1840, 1910, and today. Economists deliberately choose these dates for the following reasons:
 the year 1840 was typified by local markets, while from 1840 to 1910 saw the rise of big corporations,
and today, information technology is changing the business landscape. Let us compare these periods
with respect to the parameters cited in Table 10.13.

Table 10.13 Parameters, Time Periods, and Adaptive Strategy Principles

Parameters Time Period Adaptive Strategy Principles

1840 1840-1910 Today

Conditions Characterized by Saw the rise of big Witnessed the Conditions in the environment
small local corporations development of continuously change. They affect
markets/family-run information the evolution of businesses from
businesses technology simple to the more complicated.
Growth is a product of
development. Strategies should
be sensitive to prevailing business
conditions.
Infrastructure
Transportation Development of the Railroads dominated Automobile and air The need to transfer people,
modern railroad passenger and travel are very products, and services hastened
came about due to freight popular. There is an development and mobility. In any
the harnessing of transportation. increase in the business activity, formulated
steam power. Travel became safer, number of motor strategies need to consider
faster, and more vehicles and national efficient delivery, hauling,
reliable. highways. Air, rail, shipping storage of goods,
and ground travels services, and money.
are better
coordinated.
Communication The primary mode of The telephone was Instantaneous Communication plays a significant
long-distance growing in transmission and role in bringing ideas and
communication was importance. reception of information to business entities,
the public mail; the information due to agents, and markets. Strategies
first modern form of development in should make provisions for
communication was telecommunication efficient transmission,
the telegraph. like fax, cell phone, interaction, and exchange of
and IT. business ideas and information.
Financing Businesses were Active security There is a separation The role of financing dictates the
partnerships. Themarkets publicly of commercial from strategies to be adopted by firms.
major role of private traded the shares of investment banking. The degree, extent, and depth of
banks was thelarge firms. New The role of central business strategies are largely
issuance of credits. accounting banks has been dependent on the financing
techniques were enhanced. There is component of a business entity.
developed. increased regulation
Mandatory reporting of securities
standards for public markets.
firms became law.
Production Technology was Production Technological While technology has catalyzed
Technology relatively technology innovations, production, strategies for
undeveloped. promoted the advances in competitiveness, cost
growth of mass computerization, effectiveness, and profitability are
production. and quality largely dependent on the
management sophistication of expertise,
characterize processes, equipment, and tools.
production
capabilities and
processes.
Government Government resolved Government Government As businesses grow in size and
disputes and set the regulated antitrust bureaucracy and operations, governments regulate
rules under which laws, disability scope of government business activities. Strategies
businesses operated. insurance, worker regulation of
should include great
safety, and widows economic activities consideration of government
or children has increased. policies, laws, and regulations.
insurance.
Given these three different time periods, one can see that growth is a reality of development. Conditions transform and
mature, bringing corresponding adjustments and modifications. However, adaptive strategy principles have always been
consistent given these changing parameters.

 Vertical Boundaries of the Firm

The production of any product or operation of any service involves a whole range of activities. It
begins with the acquisition of raw materials and ends with the distribution and sale of finished goods. In
business, this is referred to as vertical chain or supply chain management. Vertical chain consists of both
major and support tasks.

Examples of major activities may include production, distribution, and sales, while support activities
may include market research, promotion, and janitorial and security services. These activities
categorized as upstream and downstream. Upstream activities are those conducted in the early
processes of the vertical chain while those in the latter stages are called downstream activities. Shown in
figure 10.5 is an example of a vertical chain in the production of confectionery.

Major Activities:

 Purchasing of Raw Input:

(Sugar, Glucose) Support Activities
 Delivery, Transportation,  Marketing
and Warehousing  Finance
 Cooking  Research
 Packaging  Promotion
 Storage and Handling
 Distribution

Figure 10.5 Vertical Chain in the Production of Confectionery

 For any business, there are two important general strategies that a company can choose from:
either for the company itself to perform the activity or for it to buy the activity from specialized
providers in the market called market firms. Both strategies have their respective benefits and costs.
They are enumerated as follows:

Table 10.14 Perform or Buy the Activity costs and Benefit Matrix

Perform the Activity Buy the Activity from Market

Firms

Benefits Operations can be smooth, Generally, market firms can

thereby avoiding discontinuity produce the activity at a lower
or process problems in terms of average cost due to so-called
quality standards and technical economies of scale. Repetition
efficiency. in production usually improves
the quality of the activity.
Mistakes, wastes, and rejects
consequently diminish.
Similarly, market firms can cater
to more companies that
demand for such activities.
Firms can save on transaction Market firms are subject to the
costs and other additional costs so-called discipline of the
that are paid to market firms. market. Hence, they need to
innovate to survive. Thus,
market firms are encouraged to
enhance their processes.
Intellectual property in the form
of private and confidential
information like pricing,
promotion, production, and
others can be guarded to the
interest of the company.
Costs Prices may become more Inasmuch as the firm buys the
expensive due to the absence of activity from a market firm,
economies of scale. there is a possibility that a gap
or coordination problem may
occur when the activity is
incongruous or not aligned with
the entire production process.
Products of companies may not There is the possibility of
undergo differentiation and leaking out hidden or private
innovation if market conditions information to market firms.
are overlooked.
Transaction costs incurred when
dealing with the market firms
can be avoided.
 Given these mentioned benefits and costs, the decision to perform or buy the activity is
dependent on whether a company will choose to perform or buy. Going back to the example of a
vertical chain in the production of confectionery, the decision is either for the company itself to
distribute its finished candy products to its wholesalers and retailers or distributors or to create a
distribution system and assign distributors to do the selling to the customers.

If the confectionery company decides to do the distribution itself, it would need to purchase at
least six delivery trucks and hire two people (driver and helper) for each delivery truck. The cost for the
amortization of each truck is P25,000.00 monthly or P150,000.00 monthly for the six trucks. The
monthly wage for each workforce is P10,000.00 or P120,000.00 monthly for six drivers and six helpers.

Total costs amount to P270,000.00. If the amount is the same, less, or a little more than the total
costs, it would be better for the company to contract this activity to a market firm. Even if the company
pays for the profit margin, the savings will be in the management of human resources, including their
benefits and incentives. On the other hand, the company may choose to do the distribution activity itself
and conduct it efficiently if it is assured of more savings, goodwill, just-in-time delivery, better customer
relationships, and other intangible benefits. In short, a "perform or buy" decision is not absolute. The
economics of strategy decides which strategy is most beneficial to the company This economics
perspective of strategy is not necessarily monetary in nature. Sometimes, the intangible economics of
strategy is most important in the conduct of any business.

 Alternatives to Vertical Integration

While vertical integration is not the best strategy, a variety of in-between strategies can be adopted
and implemented to take advantage of the benefits of both worlds. There are four popular ways to
reach a better, if not the best outcomes. They are a mixture of "perform and buy" strategies called
tapered integration, strategic alliances and joint ventures, collaborative relationships, and implicit
contracts and long-term relationships.

a. Tapered integration of the "perform and buy" strategies offers several advantages. First, it can
expand both the input and output channels without requiring monetary expenditures. Moreover, the
company can use information about the expenses and profitability of internal channels to help negotiate
contracts with independent channels. Lastly, the company can develop internal capabilities to protect
itself against independent input supplies. On the downside, tapered integration may not allow for
maximum efficiency due to sharing of both internal and external channel processes. Shared production
may lead to coordination problems, thus the need for consistency and alignment. Duplication of
processes is a common possibility.

b. Strategic alliances result when two or more firms agree to collaborate on a project or to share
resources. A strategic alliance may be horizontal as when two firms in the same industry collaborate, or
may be vertical when the partnership is between a buyer and a supplier. A joint venture is a form of
strategic alliance in which two or more firms create and jointly own a new independent organization.
This joint venture may use the workforce of both companies, or may use employees from one company
or none at all. In a strategic alliance, there is cooperation, coordination, and information sharing. This
kind of coalition is desirable when the design, production, operation, and marketing of a product or
service require competence in functional areas and when engaging in any of these functions has become
excessively costly. Furthermore, the sharing of database information cannot be overemphasized.

c. Implicit contract is an alternative for vertical integration. An implicit contract is a tacit or unspoken
understanding between parties in a business relationship. Implicit contracts exist among members of a
keiretsu. These contracts are not explicitly drawn; thus, they are not enforceable. However, losing future
business is a subtle pressure to respect and maintain the implicit contract, most especially if the
business runs to big amounts. Hence, long-term relationships are sustained.

d. Collaborative relationships are manifested in subcontract networks and keiretsu. Generally, Japanese
industrial firms are less vertically integrated compared to Western counterparts. They are smaller in size
and more specialized in focus. Many Japanese companies maintain a high degree of collaboration and
long-term commitment with their subcontractors. Relationships usually last for decades. On the other
hand, the western counterparts are business-like with their counterparts. Usually, the relationships are
entered into for specific tasks so they do not last as long the Japanese. However, the degree of quality
expected by both Japanese and Western buyers are stiff. Their subcontractors are expected to be highly
involved, perform sophisticated tasks, and essentially part of the entire company.

Keiretsus are closely related to subcontractor networks but involve a more formalized set of institutional
linkages. The leaders of these institutions are sometimes members of the Board of Directors or act as
Consultants. Examples of keiretsus are Mitsubishi and Sanwa. Each has 80 members with a core bank
that facilitates their relationships.

As shown in Figure 10.6, the company has networks with institutions like banks, other financial
institutions, and life insurance companies that are formal organizational entities. Similarly, the company
partners with trading companies that help their products. These trading companies have their own
satellite companies. Furthermore, the company networks with its suppliers that likewise have their
respective satellite companies to get their supply materials or to subcontract some activities. The
bottom line for both subcontractor networks and keiretsus is the collaborative relationships that exist
between and among the firm, its suppliers, buyers, and support institutions.

Figure 10.6 A Simple Keiretsu Relationship

  Horizontal Boundaries of the Firm

Aside from the vertical boundaries of a firm, there are parameters that consider a company’s
horizontal boundaries. Whereas vertical boundaries stress on the activities that a company performs,
the horizontal boundaries of a firm include two things: the quantity of products produced and services
rendered, and the variety of these products and services. Oftentimes, there are companies that produce
the same products but sell them at different prices at reasonable margins of profits. One reason for the
difference may be in the quantity of products sold.

A company that produces few quantities compared to one that manufactures large quantities will
vary and depend critically on economies of scale and scope. Both economies of scale and scope are
generally present whenever there is large-scale production and marketing due to cost advantage. These
so-called cost advantages affect and even shape business strategy decisions.

 Economies of Scale and Scope

Economies of scale is a condition that is exhibited when the average cost (AC) or the cost per unit of
output declines over a range of output (product/ service). For AC to decline as output increases, the
marginal cost (MC) or the cost of the last unit produced must be less than the overall average cost
MC<AC. Let us study this example.

 The total cost of five motorcycles is P150,000.00 Hence, AC is P30,000.00.

 If the MC of the sixth motorcycle is P20,000.00 then the total cost of the six motorcycles is
P170,000.00 or (P150,000.00+P20,000.00) and AC is P28,333.00 or (P170,000.00/6). Here, MC <
AC. As a rule, when MC < AC, AC falls as production increases.
 If the MC of the sixth motorcycle is P35,000.00 then the total cost of the six motorcycles is
P185,000.00 or (P150,000.00+P35,000.00) and AC is P30,333.00 or (P185,000.00/6). Here, MC >
AC. As a rule, when MC > AC, AC rises as production increases.

Based on the example,

  If AC is constant, then MC = AC. It can then be said that production exhibits constant returns to
scale.
 If AC is increasing, then MC > AC. It can then be said that production exhibits diseconomies of
scale.
 If AC is decreasing, then MC < AC. It can then be said that production exhibits economies of
scale.

To visualize economies of scale, let us go back to our motorcycle example. The following costs data
are shown in manufacturing a motorcycle (Table 10.15). The costs components are fixed costs and its
average fixed costs, variable costs and its average variable costs, and total costs and the corresponding
average total fixed costs. Fixed costs are costs that must be expended regardless of total output. They
include expenses on property, machinery, equipment, and plant. Variable costs are costs that increase
as output increases. These include expenses on labor and materials. Total cost is the sum of the fixed
costs and variable costs.

Table 10.15 Costs Matrix in Manufacturing a Motorcycle

 Figure 10.7 Average Total Costs Curve for Motorcycle

Based on the graph (Figure 10.7):

a. The average total costs started to decline as the number of motorcycles manufactured
increased. This corresponds to the range of economies of scale from the first to the fourth
motorcycle.

b. However, with the production of the fifth motorcycle, the average total costs gradually
increased from the fifth motorcycle and so on. This corresponds to the range of diseconomies of
scale.

Causes for diseconomies of scale may be due to increase in labor and material costs
mismanagement costs, and other human resource problems. Thus, the graph tends to be U-
shaped in the long run. Not all manufacturing companies follow this U-shaped curve. A company
can have an L-shaped curve when it avoids the diseconomies of scale. The causes for such
occurrences can be avoided. In most cases, use of technology can help in lengthening the
economies of scale to the advantage of the manufacturing company.

Economies of scope is a condition that is exhibited when a company achieves savings by

producing a variety of goods or rendering different services. Whereas, economies of scale is measured in
terms of unit-cost savings which is declining average cost functions, economies of scope is calculated in
terms of the relative total cost of producing products or services that are lumped together as compared
to producing the items separately. For example:

a. The total costs that a firm spends in producing a desktop computer, TC(Q x) is P28,000.00.

b. The total costs that another firm spends in producing a laptop computer, TC(Qx) is
P35,000.00.
 c. However, the total costs that a firm spends in producing both a desktop and laptop computer,
TC(Qx,Qy) is P48,000.00.

d. If TC(Qx,Qy) < TC (Qx) + TC(Qy), this production process exhibits economies of scope.

 Sources of Economies of Scale and Scope

There are different modes of achieving economies of scale and scope. Some of these ways are
spreading of indivisible fixed costs, increasing productivity of variable costs, carrying fewer inventories,
taking advantage of marketing and purchasing economies, and undertaking research and development.

a. Indivisibilities are constant fixed costs that are present regardless of production. To spread these
indivisibilities is to optimize production. Then can economies of scale be achieved.

b. Increasing productivity can minimize variable costs. Less wastes, more efficient production and
operation, maximum usage of materials, and less labor problems are ways of coming up with
efficient processes and operations.

c. Carrying few inventory stock units can minimize ordering and carrying inventory costs Expenses
on storage, payments on interest rates, and costs on stockouts can bring diseconomies of scale and
scope.

d. Exploiting market economies, most specifically, marketing and advertising costs. A firm will spend
less if it carries and sells multi-products. In this manner, distribution costs can be spent for more
than one product. This is likewise true for advertising costs. Given an umbrella structure, products
can be promoted at the same time.

e. Procuring in bulk quantities can bring opportunities for quantity discounts, adding to economies
of scale and scope.

f. Conducting research and development. Research outputs from studies conducted can be utilized
for other existing and future products and services.

 The Learning Curve

The concept of the learning curve is highly related to economies of scale. Economies of scale refer to
the cost advantages that are derived from producing outputs over a period of time. As a process is
repetitively implemented; the degree of performance improves and efficiency increases. Hence, costs in
producing the product decreases due to higher capabilities, better experience, and Expertise and less
mistakes, reworks, rejects, and other negative outcomes. The measure of learning yields is generally
expressed in terms of the progress ratio. It is calculated by computing how far average costs decrease as
the cumulative production output increases as seen in Figure 10.8.

Based on the graph (Figure 10.8), as cumulative production increases, average costs decrease.
Computing for the progress ratio, we have AC 2/AC1 or 150/200=0.75 and so on. If AC 2/AC1 is less than 1,
then learning is taking place.
 Table 10.16 Learning Curve Progress Ratio

Figure 10.8 Learning curve

In summary, companies may adopt the economics perspective of strategy. They can choose to
implement vertical and horizontal integration depending on the objectives they want to achieve. There
are different forms of these downstream and upstream activities and with the alternatives presented to
them, including their financial capability, such strategies can prove advantageous to them.

Questions 10.3

1. Differentiate upstream from downstream activities. Give examples for each.

2. What are the different alternatives to vertical integration? Which of them is the most:

a. acceptable?

b. feasible?

c. beneficial?

3. Explain the concept of the learning curve. Cite an example.

 World's Greatest Strategist

Mark Zuckerberg: Facebook Strategies

At the age of 29, Mark Zuckerberg is
one of the youngest multibillionaires
in the world. Facebook is his baby, and
he nurtures it with enormous care. He
is the youngest CEO to have
negotiated a $19 billion acquisition
over a friendly chat, as he did with the
purchase of messaging start-up
WhatsApp.
To drop tons of money in a seemingly
off-the-cuff manner is in line with his
view of "making money to build better
services." Relentless about the shape
and direction of Facebook, he uses the
company's capital to shelter fledgling
businesses as they build dominant
market positions before demanding
that the company become profitable.
WhatsApp is Zuckerberg's way of
keeping Facebook relevant, as some
data show traffic slipping among
young users. Still, there's a lot to
"like'" about this social-media leader.
 “I think as a company, if you can get these two
things right – having a clear direction on what you
are trying to do and bringing in great people who
can execute on the stuff – then you can do pretty
well.”
 “We look for people who are passionate about
something. In a way, it almost doesn't matter what
you're passionate about. What we really look for
when we're interviewing people is what they've
shown an initiative to do on their own.”
 “I believe that over time, people get remembered
for what they build, and if you build something
great, people don't care about what someone says
about you in a movie... they care about what you
build.”
 “[Facebook] is shaping a broader web. If you look
back at the past five or seven years, the story about
social networking has really been about getting
people connected... But if you look forward for the
next five years, I think that the story people are
going to remember five years from now isn't how
this one site was built; it is how every single service
that you use is now going to be better with your
friends.”
 “Helping a billion people connect is amazing,
humbling, and by far the thing I am most proud of in
my life.”

Source: T. R., Barron's Special Report 2014

Strategic Guides:

1. Study the biography of Mark Zuckerberg, CEO of Facebook. Include his childhood, if there is
something significant, his interests, his educational attainment, professional and career orientation, and
other facts that might have contributed to the success he is enjoying now.

2. Study the beginnings of Facebook, the challenges it encountered through the years, and its journey
toward success.
3. From the management, result-driven, practical, and inspirational strategies implemented by
Zuckerberg at Facebook, which struck you as something worth imitating? Explain your answer.