Strategic Management

Diplomarbeit von Marc Deuster

Abstract:

The growing or at least steady stream of literature that has been published in recent years on the variety of issues known as ‘strategic management’, both in the form of books and journal articles, some of them more, some less scientific, is ample evidence of the interest the management community takes in the subject. Likewise, game theory has experienced a surge in popularity, not only because the1994 Nobel-price was awarded to JOHN HARSANYI, JOHN NASH and REINHARD SELTEN for their contribution to the refinement of game theory but also with regard to the influence it has had on the social sciences during the last two decades, primarily on economics but also on other fields such as psychology or political science. Surprisingly, however, there is little, if any, literature available on the combination of game theory and strategic management, even though game theory is concerned with finding solutions to „strategic” problems, its terminology (bargaining, power, cooperation etc.) also being very suggestive of applications to business strategy. The consequent question then has to be: is there a need to investigate the subject further and why might it be beneficial?

Strategy is a wide field and so is game theory. Therefore the purpose of this essay cannot possibly be to explore the intricacies game theory has to offer nor can it be to investigate the depths of strategic management. Rather, it is to examine, whether game theory can be fruitfully applied to the problems faced within strategic management. In order to further narrow the topic down, there are various angles from which to approach „strategic management and game theory“. For instance, one way might be to assume that underlying strategic management as an academic discipline are various fundamental questions, which game theory is prepared to answer. One such question is „How do firms behave?“. Alternatively, one might view game theory as a set of tools assisting the strategist in finding practical solutions to specific problems within a strategic context. Here, one could think of „Should we enter this particular market in order to challenge the incumbent firm?“ or „How can we deter our competitors from starting a price war?“, „How should we organise the process of strategy formation?” and the like.

In this paper my emphasis will be on the latter approach, in the style of „Can game theory assist the general manager in coping with strategic issues arising from his daily work?“ This focus seems rewarding and interesting to me for two major reasons. One is, that the manager/executive himself has been the object of research, particularly in the areas of strategic leadership and strategic decision theory. The role of the chief executive has always been and still is a topic of particular interest in management literature and the question for the value added by a firm´s headquarters unit continues to be one of the fundamental issues in strategic management. First and foremost, however, the focus on the individual decision maker is valuable because „although strategic management has striven to attain rigorous scientific standards, its study domain has to be relevant to actual business operations“ and it „exists because of the relevance of its subject and not because of the elegance of its theory“.

Over the course of the following four chapters I will argue that game theory can certainly be of value in the conduct of strategic management, albeit on a somewhat lower or at least different level than euphoric proponents might expect. I will also seek to show that although game theory does provide some help, it does so in a limited fashion, since its logic is not applicable to the whole spectrum of content or process of strategic management.

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