Summer 2005

Professor R. Preston McAfee

Text: McAfee, R. Preston, Competitive Solutions: The Strategist's Toolkit, Princeton University Press, 2002. (Note: The text is available in paperback for $25.)

Lecture Overheads (Case overheads available after discussion)

Section I: Cooperation (4 hours)

This portion of the course develops the theory of cooperation and applies it to management strategy. Positioning for cooperation, punishment strategies, bases for cooperation, and leveraging cooperation from one area to another are considered.

Reading: McAfee, Chapter 6
Brandenberger and Nalebuff, "The Right Game: Use Game Theory to Shape Strategy," Harvard Business Review, 7-8/95, 57-71. Case: General Electric vs. Westinghouse in Large Turbine Generators (A), Harvard Business School 9-380-128

Section II: Organization theory and incentives (4 hours)

This portion of the course develops insights in organizational design and incentives, including defragmentation strategy, organizational strategies, the costs and benefits of vertical integration, the provision of incentives, multitasking, and transfer pricing.

Reading: McAfee, Chapter 7, 8
Case: Masco (A), Harvard Business School 9-386-186
Case: Masco (B), Harvard Business School 9-389-187

Section III: Pricing (2 hours)

This section covers pricing strategies, including yield management, value-based pricing, and supporting multiple versions with distinct characteristics, with many examples.

Reading: McAfee, Chapter 11

Thought questions to help prepare for the case discussion.

GE vs. Westinghouse in Large Turbine Generators Is price competition strongly rivalrous? Why or why not?

• Identify pro's and con's for the following strategies
  • Product standardization
  • Product differentiation
  • Eliminating price book
  • Tacit collusion in price (By what means?)
  • Exit or harvest
  • Lobbying government (for what?)
• In 1961, GE's share increased substantially. Is GE responsible for the price fall? If so, was it a good strategy for GE?
• Is long-distance electricity transportation (high tension wires) a complement, or substitute? Should the turbine producers encourage or discourage increased network size?
• In 1961, General Electric offered a "most favored customer clause," in which every customer is offered the best terms available to any customer, with public verification provided by an independent auditing firm. Identify and evaluate Westinghouse possible responses.

(It may be important to know that the costs of serving larger customers are less than the costs of serving smaller customers, although by a modest amount. Moreover, the industry has a history of collusion and faces intense scrutiny by government antitrust authorities.)

Masco

• Characterize Masco's acquisition strategy prior to its diversification into household furniture.
• What are Masco's competitive advantages? How does it add value to its acquisitions?
• How can Masco leverage these competitive advantages in the household furniture industry?
• What are the major elements of Masco's strategy and does the furniture industry fit with these elements?