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Fifth Week

Fifth Week. AGENDA. ICEDELIGHT The Entrepreneurship Business Game. Compare. 8 week training program in the Oakville Training Centre a store opening crew to assist the opening of the Tim Hortons store (for a maximum period of 2 weeks) the use of all Tim Hortons Manuals

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Fifth Week

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  1. Fifth Week

  2. AGENDA • ICEDELIGHT • The Entrepreneurship Business Game

  3. Compare • 8 week training program in the Oakville Training Centre • a store opening crew to assist the opening of the Tim Hortons store (for a maximum period of 2 weeks) • the use of all Tim Hortons Manuals • right to use trademarks and trade names • support from Head Office personnel who have vast knowledge in the food service business. • The Real Estate and Development Department approves and secures all locations upon which Tim Hortons stores are built, whether they are leased or purchased. Therefore, an applicant is not expected to bring forward a site and/or concern themselves with the development of such. Once the site is secured, the Construction department begins the process of building the store.

  4. Compare Training Program • New franchisees undergo an intensive eight week training program at the Training Centre. The facility includes classrooms and a fully operational store, providing trainees with intensive hands-on experience in the preparation of all products. Learning procedures, employee relations, equipment maintenance. Support Team • With head office in Ontario and offices in Nova Scotia, New Brunswick, Quebec, Calgary and BC, franchisees receive support from coast-to-coast. The team is comprised of key functions: operations, training, real estate, construction, accounting, HR, information technology, and marketing. • District Managers are the direct link to franchisees through their frequent on-site visits. In addition to their primary function of providing experienced and knowledgeable feedback and guidance, they also ensure that our standards of product quality, value, cleanliness and customer service are consistently met in all locations within their district

  5. The Entrepreneurship Business Game These notes are intended to support class discussions. They should not be considered a comprehensive set of issues to be dealt with.

  6. EXTERNAL ANALYSIS - AN OVERVIEW • Two approaches to external analysis: • Traditional Industry Analysis approach, based on Porter’s Five Forces framework • Game theoretic approach

  7. ENTREPRENEURSHIP IS ALL ABOUT CREATING AND CAPTURING VALUE • Value creation: How big a pie can be created? • Value appropriation: How big a slice can be captured from the pie? The name of the game is value creation and value appropriation

  8. THE VERTICAL CHAIN OF VALUE CREATION: CUSTOMERS AND SUPPLIERS EQUAL PARTNERS Supplier Resources/Inputs Firm Product/Service Customer Note: Suppose there are exactly one supplier, one firm, one customer.

  9. VALUE CREATION IN THE VERTICAL CHAIN VALUE CREATED = CUSTOMER’S WILLINGNESS TO PAY minus SUPPLIER’S OPPORTUNITY COST • Customer’s willingness to pay The amount of money at which the customer is indifferent between owning the product or the money. • Supplier’s opportunity cost The amount of money at which the supplier is indifferent between owning the resource (and hence deploying it in an alternative use) or trading it for money. Note: In this definition of value creation, customers and suppliers are treated symmetrically.

  10. VALUE APPROPRIATION: THROUGH BARGAINING Customer’s share Customer’s willingness to pay Price of product to the customer (bargained) Value created Firm’s share Cost of resources to the firm (bargained) Supplier’s share Supplier’s opportunity costs How much value can each player appropriate? What if there is more than one player on any level?

  11. ADDED VALUE ADDED VALUE = THE SIZE OF THE PIE WHEN YOUR FIRM IS IN THE GAME minus THE SIZE OF THE PIE WHEN YOUR FIRM IS OUT OF THE GAME THE ADDED VALUE PRINCIPLE: • In any business relationship, a player cannot capture more than its added value.(If this did not hold and a player were to capture more than its added value, the others would be capturing less value than they create. Under the assumption of unrestricted bargaining, this in turn would lead the other players to strike a deal among themselves)

  12. ADDED VALUE AS A MEASURE OF VALUE APPROPRIATION IN A GAME WITH MANY PLAYERS • Added value measure provides a partial, rather than a complete, answer to the question of how value is divided • Narrows down the range of possible outcomes • Exact split of the pie determined by bargaining • Added value measure is an exact measure of value appropriation only if THE SUM OF ADDED VALUES OF ALL PLAYERS = VALUE CREATED In general, added value is an important measure which indicates a player’s chances of capturing value

  13. VALUE AND VALUE ADDED: EXAMPLES Example 1: THE CARD GAME Example 2: GAME WITH 4 SUPPLIERS, 3 FIRMS, 2 BUYERS Assume • Each supplier (buyer) can transact with at most one firm and vice versa • Each supplier has an OC of $10 • Each buyer has a WtP of $100 for the product of the first or second firm, and a WtP of $x for the product of the third firm a) x=100: b) x=150: Value created=$(100-10)x2=180 Value created=$(150-10)+$(100-10)=$230 Added value of suppliers = 0 Added value of suppliers = 0 Added value of firms = 0 Added value of firms 1 & 2 = 0 Added value of each buyer = 90 Added value of firm 3 = $50 Added value of each buyer = $90 Now firm 3 captures $50 of value! Each buyer captures $90 of value, no firm captures any value

  14. VALUE-BASED STRATEGIES • Achieving a positive added value is the path to value appropriation • To achieve a positive added value, favorable asymmetries between the firm and its rivals must be created through the following four routes: Firm Competitors Customers’ Willingness-to-pay Suppliers’ Opportunity Cost

  15. GAME THEORY AND STRATEGY “Life is the game that must be played.” - Edwin Robinson WHAT IS GAME THEORY? • The systematic study of behavior in situations involving interdependencies between at least two actors • Examines situations in which a player in a game is affected by what others do (or do not do) and, in turn, that player’s actions affect others • A systematic way to develop strategies when one firm’s fortune depends on what other firms do Sources: The following slides are based on A.Dixit and B.Nalebuff “Thinking Strategically”, 1991, Norton; A.Brandenburger and B.Nalebuff “Co-opetittion”, 1996, Doubleday; and A. Brandenburger and H.Stuart “Value-based Business Strategy”, 1995, Harvard Business School Working Paper 93-073.

  16. GAME THEORY AND STRATEGY(CONTINUED) • ZERO SUM AND POSITIVE SUM GAMES • WHAT ARE IMPORTANT PRINCIPLES? • Focusing on others(put yourself in the shoes of the other players) • Thinking forward and reasoning backwards (draw game maps) • Assessing your added value (what do you bring to other players?) • Changing the game - not just playing it

  17. ELEMENTS OF A GAME - FIRST CUT • Players Agents who participate in the game, make choices, and receive payoffs • Payoffs Reward or punishment result of a game, ideally measured in utility • Rules Who are the players? What are the payoffs? Who knows what? Etc. • Actions (Agent-specific) choices that players can make Together these elements constitute a game

  18. IN SIMULTANEOUS GAMES PUT YOURSELF IN MANY SHOES Villain: “All that I have to say has already crossed your mind.” Sherlock Holmes: “Then possibly my answer has crossed yours.” - Sir Arthur Conan Doyle, “The Final Problem” • In a simultaneous game, the interaction does not result from seeing the other’s strategy, but from seeing through it • It is not enough to put yourself in your opponent’s shoes (what would you find?), but: Put yourself in both your own and your opponents’ shoes and then figure out the best moves for all • To square the circle of “if I think that she thinks that I think…” • Use dominant strategies (solution concept 1) • Eliminate dominated strategies (solution concept 2) • Look for an equilibrium (solution concept 3)

  19. THE PRISONER’S DILEMMA: A SIMULTANEOUS GAME WITH DOMINANT STRATEGIES • Simple solution concept: If you have a dominant strategy, use it! • However, application of concept may result in dilemma • Examples of Prisoner’s Dilemma situations: Arms races; cartels; joint ventures; pollution control; etc. Example: (Payoff table that identifies payoffs, players, actions, rules) Tchaikovsky Confess Not confess Note: (-x, -y) means that the conductor gets x years and Tchaikovsky y years imprisonment Confess (-10, -10) (-1, -25) Conductor (-25, -1) (-3, -3) Not confess

  20. SOLUTION CONCEPT 2: SUCCESSIVELY ELIMINATE DOMINATED STRATEGIES EXAMPLE: FOOTBALL GAME • Offense wants to gain as many yards as possible • Defense wants to hold others to as few yards as possible Zero sum game • Payoff table (showing the offense’s expected yardage gain): DEFENSE Counter run Counter pass Blitz the Quarterback Run 7 15 3 OFFENSE 9 8 Pass 10 (1) Are there dominant strategies? (2) Are there dominated strategies? If yes, what is the reduced game?

  21. WHAT ARE THE ELEMENTSOF THE GAME OF BUSINESS? “PARTS”! • Players(Customers, suppliers, competitors, complementors) • Added Values(What each player brings to the game) • Rules(Structure the play of the game; there are no universal rules) • Tactics(Moves used to shape the way players perceive and play the game) • Scope(Describe the boundaries of the game) Note: Each element of the game is also a strategic lever for changing it.

  22. THE GAME OF BUSINESS • Business is War and Peace: Cooperation in creating value; competition in dividing it up “You have to compete and cooperate at the same time” - Ray Noorda, Novell • Games can be lose-lose, win-lose or win-win • There is no rule book • Successful managers know how to play and change the PARTS of a game Source: This section on games is based on A.Brandenburger and B.Nalebuff, Co-opetition, Doubleday: 1996 and A. Brandenburger and B.Nalebuff, “The Right Game: Use Game Theory to Shape Strategy”, HBR, July-August 1995, pp.57-71.

  23. BUSINESS IS WAR AND PEACE

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